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SECURITIES AND EXCHANGE COMMISSION
þ | Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
o | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Delaware | 02-0636095 | |
(State or other jurisdiction of | (IRS Employer Identification No.) | |
incorporation or organization) |
121 South 17th Street | ||
Mattoon, Illinois | 61938 | |
(Address of principal executive offices) | (Zip Code) |
Title of each class: | Name of exchange on which registered: | |
Common Stock, $0.01 par value | NASDAQ Global Select Market |
Large accelerated filero | Accelerated filerþ | Non-accelerated filero | Smaller reporting companyo | |||
(Do not check if a smaller reporting company) |
Class | Outstanding as of March 3, 2010 | |
Common Stock, $0.01 par value | 29,608,653 Shares |
YEAR ENDED DECEMBER 31, 2009
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Exhibit 21.1 | ||||||||
Exhibit 23.1 | ||||||||
Exhibit 23.2 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
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ARPU | Average revenue per user | |
CLEC | Competitive local exchange carrier | |
CSA | Carrier serving area | |
DSL | Digital subscriber line | |
DVR | Digital video recorder | |
EBITDA | Earnings before interest, taxes, depreciation and amortization | |
ETFL | East Texas Fiber Line, Inc. | |
FASB | Financial Accounting Standards Board | |
FCC | Federal Communications Commission | |
GAAP | Generally accepted accounting principles | |
HD | High definition | |
ICC | Illinois Commerce Commission | |
ICTC | Illinois Consolidated Telephone Company | |
ILEC | Incumbent local exchange carrier | |
IP | Internet protocol | |
IPO | Initial public offering | |
IPTV | Internet protocol digital television | |
ISP | Internet service provider | |
LIBOR | London interbank offer rate | |
mbps | megabit per second | |
MPLS | Multi-protocol label switching | |
NECA | National Exchange Carrier Association | |
NOC | Network operations center | |
NOL | Net operating loss | |
PAPUC | Pennsylvania Public Utility Commission | |
PAUSF | Pennsylvania Universal Service Fund | |
PUCT | Public Utility Commission of Texas | |
PURA | Texas Public Utilities Regulatory Act | |
RBOC | Regional Bell Operating Company | |
RLEC | Rural local exchange carrier | |
SONET | Synchronous Optical Network | |
SPCOA | Service Provider Certificate of Operating Authority | |
TXUCV | TXU Communications Ventures Company | |
UNE | Unbundled network element | |
UNE-P | Unbundled network element platform | |
VOIP | Voice over Internet Protocol | |
WACC | Weighted-average cost of capital |
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2009 | 2008 | 2007 | ||||||||||||||||||||||
% of | % of | % of | ||||||||||||||||||||||
(in millions, except for percentages) | $ | Revenues | $ | Revenues | $ | Revenues | ||||||||||||||||||
Telephone operations: | ||||||||||||||||||||||||
Local calling services | 97.2 | 23.9 | 104.6 | 25.0 | 82.8 | 25.2 | ||||||||||||||||||
Network access services | 86.3 | 21.3 | 95.3 | 22.8 | 70.9 | 21.5 | ||||||||||||||||||
Subsidies | 56.0 | 13.8 | 55.2 | 13.2 | 46.0 | 14.0 | ||||||||||||||||||
Long-distance services | 20.4 | 5.0 | 24.1 | 5.7 | 14.2 | 4.3 | ||||||||||||||||||
Data and Internet services | 68.1 | 16.8 | 62.7 | 15.0 | 38.0 | 11.5 | ||||||||||||||||||
Other services | 36.6 | 9.0 | 37.1 | 8.9 | 36.3 | 11.0 | ||||||||||||||||||
Total telephone operations | 364.6 | 89.8 | 379.0 | 90.6 | 288.2 | 87.5 | ||||||||||||||||||
Other operations | 41.6 | 10.2 | 39.4 | 9.4 | 41.0 | 12.5 | ||||||||||||||||||
Total operating revenue | 406.2 | 100.0 | 418.4 | 100.0 | 329.2 | 100.0 | ||||||||||||||||||
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December 31, | ||||||||||||
2009 | 2008 | 2007 | ||||||||||
Residential access lines in service | 146,766 | 162,067 | 183,070 | |||||||||
Business access lines in service | 100,469 | 102,256 | 103,116 | |||||||||
Total local access lines in service | 247,235 | 264,323 | 286,186 | |||||||||
VOIP telephone subscribers | 8,665 | 6,510 | 2,494 | |||||||||
IPTV subscribers | 23,127 | 16,666 | 12,241 | |||||||||
ILEC DSL subscribers | 100,122 | 91,817 | 81,337 | |||||||||
Total broadband connections | 131,914 | 114,993 | 96,072 | |||||||||
CLEC access line equivalents(1) | 72,681 | 74,687 | 70,063 | |||||||||
Total connections | 451,830 | 454,003 | 452,321 | |||||||||
Long-distance lines(2) | 165,714 | 165,953 | 166,599 | |||||||||
Dial-up subscribers | 2,371 | 3,957 | 5,578 |
(1) | CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line. | |
(2) | Reflects the inclusion of long-distance service provided as part of our VOIP offering while excluding CLEC long-distance subscribers. |
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• | Public Servicesprovides local and long-distance service and automated calling service for correctional facilities. |
• | Business Systemssells and installs telecommunications equipment, such as key, private branch exchange (PBX), and IP-based telephone systems, to business customers in Texas and Illinois. |
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• | Positioning ourselves as a single point of contact for our customers’ communications needs; |
• | Providing customers with a broad array of voice and data services, and bundling these services whenever possible; |
• | Providing excellent customer service, including 24-hour, 7-days a week centralized customer support to coordinate installation of new services, repair and maintenance functions; |
• | Developing and delivering new services to meet evolving customer needs and market demands; and |
• | Leveraging our history and involvement with local communities and expanding “Consolidated Communications” and “Consolidated” brand recognition. |
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# of | Contract | |||||||||||
Employees | Union | Expiration | ||||||||||
Location | Covered | (1) | Date | |||||||||
Illinois | 340 | IBEW | 11/15/2012 | |||||||||
Lufkin/Conroe, Texas | 181 | CWA | 10/16/2010 | |||||||||
Pennsylvania (ILEC) | 66 | CWA | 09/30/2011 | |||||||||
Katy, Texas | 38 | CWA | 02/28/2011 | |||||||||
Pennsylvania (CLEC) | 11 | CWA | 02/29/2012 | |||||||||
Totals | 636 | |||||||||||
(1) | IBEW — International Brotherhood of Electrical Workers | |
CWA — Communication Workers of America |
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• | Providing superior quality services to rural customers in a regulated environment; |
• | Implementing successful business acquisitions and integrations; and |
• | Launching and growing new services, such as DSL and IPTV, along with managing CLEC businesses and complementary services, such as transport, business systems and directory publishing. |
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• | The market is attractive; |
• | The network is of appropriate quality; |
• | We can integrate the acquired company efficiently; |
• | There are significant potential operating synergies; and |
• | The transaction is cash flow accretive from day one. |
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• | Allow other carriers to resell their services; |
• | Provide number portability where feasible; |
• | Ensure dialing parity, meaning that consumers can choose their default local or long-distance telephone company without having to dial additional digits; |
• | Ensure that competitors’ customers receive non-discriminatory access to telephone numbers, operator service, directory assistance, and directory listings; |
• | Afford competitors access to telephone poles, ducts, conduits, and rights-of-way; and |
• | Establish reciprocal compensation arrangements with other carriers for the transport and termination of telecommunications traffic. |
• | Negotiate interconnection agreements with other carriers in good faith; |
• | Interconnect their facilities and equipment with any requesting telecommunications carrier, at any technically feasible point, at non-discriminatory rates and on non-discriminatory terms and conditions; |
• | Offer their retail services to other carriers for resale at discounted wholesale rates; |
• | Provide reasonable notice of changes in the information necessary for transmission and routing of services over the incumbent telephone company’s facilities or in the information necessary for interoperability; and |
• | Provide, at rates, terms, and conditions that are just, reasonable, and non-discriminatory, for the physical collocation of other carriers’ equipment necessary for interconnection or access to UNEs at the premises of the incumbent telephone company. |
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• | Demographic trends; |
• | In Illinois, the strength of the agricultural markets and the light manufacturing and services industries, continued demand from universities and hospitals, and the level of government spending; |
• | In Pennsylvania, the strength of small- to medium-sized businesses, healthcare, and education spending; and |
• | In Texas, the strength of the manufacturing, healthcare, waste management, and retail industries and continued demand from schools and hospitals. |
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• | The state of our business, the environment in which we operate, and the various risks we face, including competition, technological change, changes in our industry, and regulatory and other risks summarized in this Annual Report on Form 10-K; |
• | Changes in the factors, assumptions, and other considerations made by our board of directors in reviewing and adopting the dividend policy, as described under “Dividend Policy and Restrictions” in Item 5 of this Annual Report; |
• | Our results of operations, financial condition, liquidity needs, and capital resources; |
• | Our expected cash needs, including for interest and any future principal payments on indebtedness, capital expenditures, taxes, and pension and other postretirement contributions; and |
• | Potential sources of liquidity, including borrowing under our revolving credit facility or possible asset sales. |
• | Reduce or eliminate dividends; |
• | Fund dividends by incurring additional debt (to the extent we are permitted to do so under the agreements governing our then-existing debt), which would increase our leverage, debt repayment obligations, and interest expense, decrease our interest coverage, and reduce our capacity to incur debt for other purposes, including to fund future dividend payments; |
• | Amend the terms of our credit agreement, if our lenders agree, to permit us to pay dividends or make other payments the agreement would otherwise restrict; |
• | Fund dividends by issuing equity securities, which could be dilutive to our stockholders and negatively affect the price of our common stock; |
• | Fund dividends from other sources, such as by asset sales or working capital, which would leave us with less cash available for other purposes; and |
• | Reduce other expected uses of cash, such as capital expenditures. |
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• | Divide our board of directors into three classes, which results in roughly one-third of our directors being elected each year; |
• | Require the affirmative vote of holders of 75% or more of the voting power of our outstanding common stock to approve any merger, consolidation, or sale of all or substantially all of our assets; |
• | Provide that directors may only be removed for cause and then only upon the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock; |
• | Require the affirmative vote of holders of two-thirds or more of the voting power of our outstanding common stock to amend, alter, change, or repeal specified provisions of our amended and restated certificate of incorporation and bylaws; |
• | Require stockholders to provide us with advance notice if they wish to nominate any candidates for election to our board of directors or if they intend to propose any matters for consideration at an annual stockholders meeting; and |
• | Authorize the issuance of so-called “blank check” preferred stock without stockholder approval upon such terms as the board of directors may determine. |
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• | The election of directors; |
• | Significant corporate transactions, such as a merger or other sale of our company or its assets; |
• | Acquisitions that increase our indebtedness or the sale of revenue-generating assets; |
• | Corporate and management policies; |
• | Amendments to our organizational documents; and |
• | Other matters submitted to our stockholders for approval. |
• | We may be required to use a substantial portion of our cash flow from operations to make interest payments on our debt, which will reduce funds available for operations, future business opportunities, and dividends; |
• | We may have limited flexibility to react to changes in our business and our industry; |
• | It may be more difficult for us to satisfy our other obligations; |
• | We may have a limited ability to borrow additional funds or to sell assets to raise funds if needed for working capital, capital expenditures, acquisitions, or other purposes; |
• | We may become more vulnerable to general adverse economic and industry conditions, including changes in interest rates; and |
• | We may be at a disadvantage compared to our competitors that have less debt. |
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• | Incur additional debt and issue preferred stock; |
• | Make restricted payments, including paying dividends on, redeeming, repurchasing, or retiring our capital stock; |
• | Make investments and prepay or redeem debt; |
• | Enter into agreements restricting our subsidiaries’ ability to pay dividends, make loans, or transfer assets to us; |
• | Create liens; |
• | Sell or otherwise dispose of assets, including capital stock of subsidiaries; |
• | Engage in transactions with affiliates; |
• | Engage in sale and leaseback transactions; |
• | Make capital expenditures; |
• | Engage in a business other than telecommunications; and |
• | Consolidate or merge. |
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• | Increased competition within established markets from providers that may offer competing or alternative services; |
• | The blurring of traditional dividing lines between, and the bundling of, different services, such as local dial tone, long-distance, wireless, cable, and data and Internet services; and |
• | An increase in mergers and strategic alliances that allow one telecommunications provider to offer increased services or access to wider geographic markets. |
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• | Permits the applicable state agency to terminate the contract without cause and without penalty under some circumstances; |
• | Has renewal provisions that require decisions of state agencies that are subject to political influence; |
• | Gives the State of Illinois the right to renew the contract at its option but does not give us the same right; and |
• | Could be cancelled if state funding becomes unavailable. |
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• | Hazardous materials may have been released at properties that we currently own or formerly owned (perhaps through our predecessors). Under certain environmental laws, we could be held liable, without regard to fault, for the costs of investigating and remediating any actual or threatened contamination at these properties, and for contamination associated with disposal by us or our predecessors of hazardous materials at third-party disposal sites. |
• | We could incur substantial costs in the future if we acquire businesses or properties subject to environmental requirements or affected by environmental contamination. In particular, environmental laws regulating wetlands, endangered species, and other land use and natural resource issues may increase costs associated with future business or expansion opportunities or delay, alter, or interfere with such plans. |
• | The presence of contamination can adversely affect the value of our properties and make it difficult to sell any affected property or to use it as collateral. |
• | We could be held responsible for third-party property damage claims, personal injury claims, or natural resource damage claims relating to contamination found at any of our current or past properties. |
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Operating segment | Approximate | |||||||||||
Owned/ | Telephone | Other | square | |||||||||
Location | Primary Use | leased | Operations | Operations | footage | |||||||
Gibsonia, PA | Office and switching | Owned | X | X | 91,141 | |||||||
Conroe, TX | Regional office | Owned | X | X | 51,900 | |||||||
Mattoon, IL | Order fulfillment | Leased | X | 50,000 | ||||||||
Mattoon, IL | Corporate office | Leased | X | X | 49,100 | |||||||
Mattoon, IL | Operator services and operations | Owned | X | X | 36,300 | |||||||
Charleston, IL | Communications center and office | Leased | X | X | 34,000 | |||||||
Mattoon, IL | Operations and distribution center | Leased | X | X | 30,900 | |||||||
Mattoon, IL | Sales and administration center | Leased | X | X | 30,700 | |||||||
Lufkin, TX | Office and switching | Owned | X | X | 28,707 | |||||||
Conroe, TX | Warehouse and plant | Owned | X | X | 28,500 | |||||||
Terre Haute, IN | Communications center and office | Leased | X | X | 25,450 | |||||||
Lufkin, TX | Communications center and office | Owned | X | X | 23,190 | |||||||
Katy, TX | Warehouse and office | Owned | X | X | 19,716 | |||||||
Butler, PA | Office and switching | Owned | X | X | 18,564 | |||||||
Taylorville, IL | Communications center and office | Owned | X | X | 15,900 | |||||||
Taylorville, IL | Operations and distribution center | Leased | X | X | 14,700 | |||||||
Lufkin, TX | Warehouse | Owned | X | X | 14,200 | |||||||
Cranberry Township, PA | Office and switching | Owned | X | X | 13,110 | |||||||
Charleston, IL | Communications center and office | Owned | X | X | 12,661 | |||||||
Litchfield, IL | Office and switching | Owned | X | X | 12,190 | |||||||
Lufkin, TX | Office and data center | Owned | X | X | 11,900 | |||||||
Conroe, TX | Office | Owned | X | X | 10,650 | |||||||
Mattoon, IL | Office | Owned | X | X | 10,100 |
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Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities |
2009 | 2008 | |||||||||||||||
Period | High | Low | High | Low | ||||||||||||
First quarter | 12.48 | 7.90 | 19.19 | 14.00 | ||||||||||||
Second quarter | 12.12 | 10.24 | 15.71 | 13.70 | ||||||||||||
Third quarter | 16.01 | 11.17 | 15.74 | 13.48 | ||||||||||||
Fourth quarter | 17.48 | 13.60 | 14.65 | 7.82 |
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Among Consolidated Communications Holdings, The S&P 500 Index,
The Dow Jones US Fixed-Line Telecommunications Index And A Peer Group
* | $100 invested on 7/22/05 in stock or 6/30/05 in index, including reinvestment of dividends. Fiscal year ending December 31. | |
Copyright© 2010 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved. Copyright© 2010 Dow Jones & Co. All rights reserved. |
At December 31, | ||||||||||||||||||||
(In dollars) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Consolidated | 197.31 | 118.58 | 177.23 | 172.70 | 97.12 | |||||||||||||||
S&P Telecom Services | 102.94 | 81.40 | 129.21 | 122.48 | 105.77 | |||||||||||||||
Dow Jones US Fixed — Line Tele. | 137.54 | 126.59 | 174.36 | 149.99 | 100.47 | |||||||||||||||
Peer Group | 39.03 | 26.70 | 92.59 | 199.36 | 115.13 |
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Total number of | Maximum number | |||||||||||||||
Shares purchased | of shares that may | |||||||||||||||
Total number of | Average price paid | As part of publicly | yet be purchased | |||||||||||||
Purchase period | Shares purchased | Per share | announced plans | under the plans | ||||||||||||
October 2009 | 2,646 | $ | 15.66 | n/a | n/a | |||||||||||
November 2009 | 1,954 | $ | 14.20 | n/a | n/a | |||||||||||
December 2009 | 28,975 | $ | 16.11 | n/a | n/a |
Year ended December 31, | ||||||||||||||||||||
(In millions, except per share amounts) | 2009 | 2008 | 2007 (6) | 2006 | 2005 | |||||||||||||||
Telephone operations revenues | $ | 364.6 | $ | 379.0 | $ | 288.2 | $ | 280.4 | $ | 282.3 | ||||||||||
Other operations revenues | 41.6 | 39.4 | 41.0 | 40.4 | 39.1 | |||||||||||||||
Total operating revenues | 406.2 | 418.4 | 329.2 | 320.8 | 321.4 | |||||||||||||||
Cost of products and services (exclusive of depreciation and amortization shown separately below) | 145.5 | 143.5 | 107.3 | 98.1 | 101.1 | |||||||||||||||
Selling, general and administrative expense | 104.8 | 108.8 | 89.6 | 94.7 | 98.8 | |||||||||||||||
Intangible asset impairment | — | 6.1 | — | 11.3 | — | |||||||||||||||
Depreciation and amortization | 85.2 | 91.7 | 65.7 | 67.4 | 67.4 | |||||||||||||||
Income from operations | 70.7 | 68.3 | 66.6 | 49.3 | 54.1 | |||||||||||||||
Interest expense, net (1) (2) | (57.9 | ) | (66.3 | ) | (46.5 | ) | (42.9 | ) | (53.4 | ) | ||||||||||
Other, net (3) | 25.5 | 10.8 | (3.4 | ) | 8.0 | 6.4 | ||||||||||||||
Income before income taxes and extraordinary item | 38.3 | 12.8 | 16.7 | 14.4 | 7.1 | |||||||||||||||
Income tax expense | 12.4 | 6.6 | 4.7 | 0.4 | 10.9 | |||||||||||||||
Income (loss) before extraordinary item | 25.9 | 6.2 | 12.0 | 14.0 | (3.8 | ) | ||||||||||||||
Extraordinary item, net of tax | — | 7.2 | — | — | — | |||||||||||||||
Net income (loss) | 25.9 | 13.4 | 12.0 | 14.0 | (3.8 | ) | ||||||||||||||
Net income of noncontrolling interest (4) | 1.0 | 0.9 | 0.6 | 0.7 | 0.7 | |||||||||||||||
Net income (loss) attributable to common stockholders (4) | 24.9 | 12.5 | 11.4 | 13.3 | (4.5 | ) | ||||||||||||||
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Year ended December 31, | ||||||||||||||||||||
(In millions, except per share amounts) | 2009 | 2008 | 2007 (6) | 2006 | 2005 | |||||||||||||||
Dividends on redeemable preferred shares | — | — | — | — | (10.2 | ) | ||||||||||||||
Net income (loss) applicable to common shares | $ | 24.9 | $ | 12.5 | $ | 11.4 | $ | 13.3 | $ | (14.7 | ) | |||||||||
Income per common share—basic: (5) | ||||||||||||||||||||
Income per common share before extraordinary item | $ | 0.84 | $ | 0.18 | $ | 0.43 | $ | 0.48 | $ | (0.83 | ) | |||||||||
Extraordinary item per share | — | 0.24 | — | — | — | |||||||||||||||
Net income per common share—basic | $ | 0.84 | $ | 0.42 | $ | 0.43 | $ | 0.48 | $ | (0.83 | ) | |||||||||
Basic weighted-average number of shares | 29,396 | 29,321 | 25,764 | 27,740 | 17,822 | |||||||||||||||
Income per common share—diluted: (5) | ||||||||||||||||||||
Income per common share before extraordinary item | $ | 0.84 | $ | 0.18 | $ | 0.43 | $ | 0.48 | $ | (0.83 | ) | |||||||||
Extraordinary item per share | — | 0.24 | — | — | — | |||||||||||||||
Net income per common share—diluted | $ | 0.84 | $ | 0.42 | $ | 0.43 | $ | 0.48 | $ | (0.83 | ) | |||||||||
Diluted weighted-average number of common and common equivalent shares | 29,396 | 29,321 | 25,764 | 28,171 | 17,822 | |||||||||||||||
Cash dividends per common share | $ | 1.55 | $ | 1.55 | $ | 1.55 | $ | 1.55 | $ | 0.80 | ||||||||||
Consolidated cash flow data: | ||||||||||||||||||||
Cash flows from operating activities | $ | 116.3 | $ | 92.4 | $ | 82.1 | $ | 84.6 | $ | 79.3 | ||||||||||
Cash flows used for investing activities | (41.6 | ) | (48.0 | ) | (305.3 | ) | (26.7 | ) | (31.1 | ) | ||||||||||
Cash flows used for financing activities | (47.4 | ) | (63.3 | ) | 230.9 | (62.7 | ) | (68.9 | ) | |||||||||||
Capital expenditures | 42.4 | 48.0 | 33.5 | 33.4 | 31.1 | |||||||||||||||
Consolidated Balance Sheet: | ||||||||||||||||||||
Cash and cash equivalents | $ | 42.8 | $ | 15.5 | $ | 34.3 | $ | 26.7 | $ | 31.4 | ||||||||||
Total current assets | 104.4 | 78.6 | 99.6 | 74.2 | 79.0 | |||||||||||||||
Net property, plant and equipment (7) | 377.2 | 400.3 | 411.6 | 314.4 | 335.1 | |||||||||||||||
Total assets | 1,223.0 | 1,241.6 | 1,304.6 | 889.6 | 946.0 | |||||||||||||||
Total long-term debt (including current portion) (2)(8) | 880.3 | 881.3 | 892.6 | 594.0 | 555.0 | |||||||||||||||
Stockholders equity | 80.7 | 75.3 | 159.7 | 118.7 | 202.2 | |||||||||||||||
Other financial data (unaudited): | ||||||||||||||||||||
Adjusted EBITDA (9) | $ | 188.8 | $ | 189.8 | $ | 143.8 | $ | 139.8 | $ | 136.8 | ||||||||||
Other data (as of the end of the period) (Unaudited): | ||||||||||||||||||||
Local access lines | ||||||||||||||||||||
Residential | 146,766 | 162,067 | 183,070 | 155,354 | 162,231 | |||||||||||||||
Business | 100,469 | 102,256 | 103,116 | 78,335 | 79,793 | |||||||||||||||
Total local access lines | 247,235 | 264,323 | 286,186 | 233,689 | 242,024 | |||||||||||||||
CLEC access line equivalents | 72,681 | 74,687 | 70,063 | — | — | |||||||||||||||
VOIP subscribers | 8,665 | 6,510 | 2,494 | — | — | |||||||||||||||
IPTV subscribers | 23,127 | 16,666 | 12,241 | 6.954 | 2,146 | |||||||||||||||
ILEC DSL subscribers | 100,122 | 91,817 | 81,337 | 52,732 | 39,192 | |||||||||||||||
Total connections | 451,830 | 454,003 | 452,321 | 293,375 | 283,362 | |||||||||||||||
(1) | Interest expense includes amortization of deferred financing costs totaling $1.3 million for the year ended December 31, 2009, $1.4 million for 2008, $3.2 million for 2007, $3.3 million for 2006, and $5.5 million for 2005. | |
(2) | In connection with the acquisition of North Pittsburgh on December 31, 2007, we incurred $296.0 million new term debt, net of the repayment of existing debt. All remaining senior notes were retired on April 1, 2008. | |
(3) | We recognized $0.3 million and $2.8 million of net proceeds in other income in 2007 and 2005, respectively, because we received key-man life insurance proceeds relating to the passing of former TXUCV employees. |
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(4) | We adopted the FASB’s authoritative guidance on the presentation of noncontrolling interests in consolidated financial statements effective January 1, 2009. This presentation has been retrospectively applied to all periods presented. | |
(5) | We adopted the FASB’s authoritative guidance on the treatment of participating securities in the calculation of earnings per share on January 1, 2009. This presentation has been retrospectively applied to all periods presented. | |
(6) | We acquired North Pittsburgh on December 31, 2007. Balance sheet and other data as of that date includes the accounts of North Pittsburgh. Our results of operations include North Pittsburgh beginning January 1, 2008. | |
(7) | Property, plant and equipment are recorded at cost. The cost of additions, replacements, and major improvements is capitalized, while repairs and maintenance are charged to expenses. When property, plant and equipment are retired from our regulated subsidiaries, the original cost, net of salvage, is charged against accumulated depreciation, with no gain or loss recognized in accordance with composite group life remaining methodology used for regulated telephone plant assets. | |
(8) | In July 2006, we repurchased and retired approximately 3.8 million shares of our common stock for approximately $56.7 million, or $15.00 per share. We financed this transaction using approximately $17.7 million of cash on hand and $39.0 million of additional term-loan borrowings. | |
(9) | We present Adjusted EBITDA for three reasons: we believe it is a useful indicator of our historical debt capacity and our ability to service debt and pay dividends; it provides a measure of consistency in our financial reporting; and covenants in our credit facilities contain ratios based on Adjusted EBITDA. |
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Year ended December 31, | ||||||||||||||||||||
(In millions, unaudited) | 2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
Net cash provided by operating activities | $ | 116.3 | $ | 92.4 | $ | 82.1 | $ | 84.6 | $ | 79.3 | ||||||||||
Non-cash, stock-based compensation | (1.9 | ) | (1.9 | ) | (4.0 | ) | (2.5 | ) | (8.6 | ) | ||||||||||
Other adjustments, net (a) | (1.0 | ) | 3.8 | (9.5 | ) | (2.0 | ) | (18.0 | ) | |||||||||||
Changes in operating assets and liabilities | (2.2 | ) | 9.9 | 8.5 | 0.6 | 10.2 | ||||||||||||||
Interest expense, net | 57.9 | 66.3 | 46.5 | 42.9 | 53.4 | |||||||||||||||
Income taxes | 12.4 | 6.6 | 4.7 | 0.4 | 10.9 | |||||||||||||||
EBITDA (b) | 181.5 | 177.1 | 128.3 | 124.0 | 127.2 | |||||||||||||||
Adjustments to EBITDA (c): | ||||||||||||||||||||
Integration, restructuring and Sarbanes Oxley (d) | 7.4 | 4.8 | 1.2 | 3.7 | 7.4 | |||||||||||||||
Professional service fees (e) | — | — | — | 2.9 | ||||||||||||||||
Other, net (f) | (24.4 | ) | (19.9 | ) | (6.6 | ) | (7.1 | ) | (3.0 | ) | ||||||||||
Investment distributions (g) | 22.4 | 17.8 | 6.6 | 5.5 | 1.6 | |||||||||||||||
Pension curtailment gain (h) | — | — | — | — | (7.9 | ) | ||||||||||||||
Loss on extinguishment of debt (i) | — | 9.2 | 10.3 | — | — | |||||||||||||||
Intangible asset impairment (a) | — | 6.1 | — | 11.2 | — | |||||||||||||||
Extraordinary item (j) | — | (7.2 | ) | — | — | — | ||||||||||||||
Non-cash, stock-based compensation (k) | 1.9 | 1.9 | 4.0 | 2.5 | 8.6 | |||||||||||||||
Adjusted EBITDA | $ | 188.8 | $ | 189.8 | $ | 143.8 | $ | 139.8 | $ | 136.8 | ||||||||||
(a) | Other adjustments, net includes $6.1 million and $11.2 million of intangible asset impairment charges for years ended December 31, 2008 and December 31, 2006, respectively. During our annual impairment review for 2008, we determined that the projected future cash flows of CMR would not be sufficient to support the carrying value of the goodwill. In addition, based on a decline in estimated future cash flows of CMR and operator services business, our 2006 annual impairment review determined that the value of the customer lists associated with these businesses was impaired. Non-cash impairment charges are excluded in arriving at Adjusted EBITDA under our credit facility. | |
(b) | EBITDA is defined as net earnings (loss) before interest expense, income taxes, depreciation, and amortization on an unadjusted basis. | |
(c) | These adjustments reflect those required or permitted by the lenders under the credit facility in place at the end of each of the years included in the periods presented. |
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(d) | In connection with the TXUCV acquisition, we incurred certain expenses associated with integrating and restructuring the businesses. These expenses include severance; employee relocation expenses; Sarbanes-Oxley start-up costs; and costs to integrate our technology, administrative and customer service functions, and billing systems. In connection with the North Pittsburgh acquisition we incurred similar expenses with the exception of Sarbanes-Oxley start-up costs. | |
(e) | Represents the aggregate professional service fees paid to certain large equity investors prior to our initial public offering. Upon closing of the initial public offering, these service agreements terminated. | |
(f) | Other, net includes the equity earnings from our investments, dividend income, and certain other miscellaneous non-operating items. Key man life insurance proceeds of $0.3 million and $2.8 million received in 2007 and 2005, respectively, are not deducted to arrive at Adjusted EBITDA. | |
(g) | For purposes of calculating Adjusted EBITDA, we include all cash dividends and other cash distributions received from our investments. | |
(h) | Represents a $7.9 million curtailment gain associated with the amendment of our Texas pension plan. The gain was recorded in general and administrative expenses. However, because the gain is non-cash, it is excluded from Adjusted EBITDA. | |
(i) | Represents the redemption premium and write-off of unamortized debt issuance costs in connection with the redemption and retirement of our senior notes during 2008 and the write-off of debt issuance costs in connection with retiring the obligations under our former credit facility and entering into a new credit facility contemporaneously with the North Pittsburgh acquisition. | |
(j) | Upon making the election to discontinue the applicable accounting guidance for regulated enterprises in accounting for the effects of certain types of regulation, we recognized an extraordinary non-cash gain and began to apply the authoritative guidance required for the discontinuance of the application of regulatory accounting. See the financial statements and footnotes for additional information. | |
(k) | Represents compensation expenses in connection with our Restricted Share Plan. Because of their non-cash nature, these expenses are excluded from Adjusted EBITDA. |
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• | Aggressively promoting DSL service, including selling DSL as a stand-alone offering; |
• | Value bundling services, such as DSL or IPTV, with a combination of local service and custom calling features; |
• | Maintaining excellent customer service standards; and |
• | Keeping a strong local presence in the communities we serve. |
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• | Hosted VOIP service in all of our markets to meet the needs of small- to medium-sized business customers that want robust functionality without having to purchase a traditional key or PBX phone system; |
• | VOIP service for residential customers, which is being offered to our customers as a growth opportunity and as an alternative to the traditional phone line for customers who are considering a switch to a cable competitor. Since we began to more aggressively promote our VOIP service in situations in which we are attempting to save or win back customers, we estimate that the product has allowed us to reduce our residential customer loss by 10%; |
• | DSL service—even to users who do not have our access line—which expands our customer base and creates additional revenue-generating opportunities; |
• | Metro-Ethernet services delivered over our copper infrastructure with speeds of 25 mbps to 40 mbps; |
• | DSL product with speeds up to 20 mbps for those customers desiring greater Internet speed; and |
• | High definition video service and digital video recorders in all of our IPTV markets. |
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• | Operating expenses relating to plant costs, including those related to the network and general support costs, central office switching and transmission costs, and cable and wire facilities; |
• | General plant costs, such as testing, provisioning, network, administration, power, and engineering; and |
• | The cost of transport and termination of long-distance and private lines outside our rural telephone companies’ service area. |
Years | ||||
Buildings | 18–40 | |||
Network and outside plant facilities | 3–50 | |||
Furniture, fixtures and equipment | 3–15 | |||
Capital Leases | 11 |
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For the years ended December 31, | ||||||||||||||||
2009 | 2008 | |||||||||||||||
(in million, except for percentages) | $ | % | $ | % | ||||||||||||
Revenue | ||||||||||||||||
Telephone operations | ||||||||||||||||
Local calling services | 97.2 | 23.9 | 104.6 | 25.0 | ||||||||||||
Network access services | 86.3 | 21.3 | 95.3 | 22.8 | ||||||||||||
Subsidies | 56.0 | 13.8 | 55.2 | 13.2 | ||||||||||||
Long-distance services | 20.4 | 5.0 | 24.1 | 5.7 | ||||||||||||
Data and Internet services | 68.1 | 16.8 | 62.7 | 15.0 | ||||||||||||
Other services | 36.6 | 9.0 | 37.1 | 8.9 | ||||||||||||
Total telephone operations | 364.6 | 89.8 | 379.0 | 90.6 | ||||||||||||
Other operations | 41.6 | 10.2 | 39.4 | 9.4 | ||||||||||||
Total operating revenue | 406.2 | 100.0 | 418.4 | 100.0 | ||||||||||||
Expenses | ||||||||||||||||
Telephone operations | 211.1 | 52.0 | 214.5 | 51.2 | ||||||||||||
Other operations | 39.2 | 9.6 | 43.8 | 10.5 | ||||||||||||
Depreciation and amortization | 85.2 | 21.0 | 91.7 | 21.9 | ||||||||||||
Total operating expense | 335.5 | 82.6 | 350.0 | 83.6 | ||||||||||||
Income from operations | 70.7 | 17.4 | 68.4 | 16.4 | ||||||||||||
Interest expense, net | 57.9 | 14.3 | 66.3 | 15.9 | ||||||||||||
Other income | 25.5 | 6.3 | 10.7 | 2.6 | ||||||||||||
Income tax expense | 12.4 | 3.0 | 6.6 | 1.6 | ||||||||||||
Income before extraordinary item | 25.9 | 6.4 | 6.2 | 1.5 | ||||||||||||
Extraordinary item, net of tax | — | — | 7.2 | 1.7 | ||||||||||||
Net income | 25.9 | 6.4 | 13.4 | 3.2 | ||||||||||||
Net income attributable to noncontrolling interest | 1.0 | 0.3 | 0.9 | 0.2 | ||||||||||||
Net income attributable to common stockholders | 24.9 | 6.1 | 12.5 | 3.0 | ||||||||||||
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December 31, | ||||||||
2009 | 2008 | |||||||
Residential access lines in service | 146,766 | 162,067 | ||||||
Business access lines in service | 100,469 | 102,256 | ||||||
Total local access lines in service | 247,235 | 264,323 | ||||||
VOIP subscribers | 8,665 | 6,510 | ||||||
IPTV subscribers | 23,127 | 16,666 | ||||||
ILEC DSL subscribers | 100,122 | 91,817 | ||||||
Total broadband connections | 131,914 | 114,993 | ||||||
CLEC access line equivalents(1) | 72,681 | 74,687 | ||||||
Total connections | 451,830 | 454,003 | ||||||
Long-distance lines(2) | 165,714 | 165,953 | ||||||
Dial-up subscribers | 2,371 | 3,957 |
(1) | CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line. | |
(2) | Reflects the inclusion of long-distance service provided as part of our VOIP offering while excluding CLEC long-distance subscribers |
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For the years ended December 31, | ||||||||||||||||
2008 | 2007 | |||||||||||||||
(in million, except for percentages) | $ | % | $ | % | ||||||||||||
Revenue | ||||||||||||||||
Telephone operations | ||||||||||||||||
Local calling services | 104.6 | 25.0 | 82.8 | 25.2 | ||||||||||||
Network access services | 95.3 | 22.8 | 70.9 | 21.5 | ||||||||||||
Subsidies | 55.2 | 13.2 | 46.0 | 14.0 | ||||||||||||
Long-distance services | 24.1 | 5.7 | 14.2 | 4.3 | ||||||||||||
Data and Internet services | 62.7 | 15.0 | 38.0 | 11.5 | ||||||||||||
Other services | 37.1 | 8.9 | 36.3 | 11.0 | ||||||||||||
Total telephone operations | 379.0 | 90.6 | 288.2 | 87.5 | ||||||||||||
Other operations | 39.4 | 9.4 | 41.0 | 12.5 | ||||||||||||
Total operating revenue | 418.4 | 100.0 | 329.2 | 100.0 | ||||||||||||
Expenses | ||||||||||||||||
Telephone operations | 214.5 | 51.2 | 155.0 | 47.1 | ||||||||||||
Other operations | 43.8 | 10.5 | 41.9 | 12.7 | ||||||||||||
Depreciation and amortization | 91.7 | 21.9 | 65.7 | 20.0 | ||||||||||||
Total operating expense | 350.0 | 83.6 | 262.6 | 79.8 | ||||||||||||
Income from operations | 68.4 | 16.4 | 66.6 | 20.2 | ||||||||||||
Interest expense, net | 66.3 | 15.9 | 46.5 | 14.1 | ||||||||||||
Other income | 10.7 | 2.6 | (3.4 | ) | (1.0 | ) | ||||||||||
Income tax expense | 6.6 | 1.6 | 4.7 | 1.4 | ||||||||||||
Income before extraordinary item | 6.2 | 1.5 | 12.0 | 3.7 | ||||||||||||
Extraordinary item, net of tax | 7.2 | 1.7 | — | — | ||||||||||||
Net income | 13.4 | 3.2 | 12.0 | 3.7 | ||||||||||||
Net income attributable to noncontrolling interest | 0.9 | 0.2 | 0.6 | 0.2 | ||||||||||||
Net income attributable to common stockholders | 12.5 | 3.0 | 11.4 | 3.5 | ||||||||||||
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December 31, | ||||||||
2008 | 2007 | |||||||
Residential access lines in service | 162,067 | 183,070 | ||||||
Business access lines in service | 102,256 | 103,116 | ||||||
Total local access lines in service | 264,323 | 286,186 | ||||||
VOIP subscribers | 6,510 | 2,494 | ||||||
IPTV subscribers | 16,666 | 12,241 | ||||||
ILEC DSL subscribers | 91,817 | 81,337 | ||||||
Total broadband connections | 114,993 | 96,072 | ||||||
CLEC access line equivalents(1) | 74,687 | 70,063 | ||||||
Total connections | 454,003 | 452,321 | ||||||
Long-distance lines(2) | 165,953 | 166,599 | ||||||
Dial-up subscribers | 3,957 | 5,578 |
(1) | CLEC access line equivalents represent a combination of voice services and data circuits. The calculations represent a conversion of data circuits to an access line basis. Equivalents are calculated by converting data circuits (basic rate interface, primary rate interface, DSL, DS-1, DS-3 and Ethernet) and SONET-based (optical) services (OC-3 and OC-48) to the equivalent of an access line. | |
(2) | Reflects the inclusion of long-distance service provided as part of our VOIP offering while excluding CLEC long-distance subscribers |
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Telephone operations | $ | 519.5 million | ||
Prison Systems | $ | 0.2 million | ||
Business Systems | $ | 0.8 million |
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• | A change in the use or perceived value of our tradenames; |
• | Significant underperformance relative to historical or projected future operating results; |
• | Significant regulatory changes that would impact future operating revenues; |
• | Significant changes in our customer base; |
• | Significant negative industry or economic trends; or |
• | Significant changes in the overall strategy we employ to operate our business. |
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December 31, | |||||||||||
(In thousands) | 2009 | 2008 | |||||||||
Cash and cash equivalents | $ | 42,758 | $ | 15,471 | |||||||
Working capital | 23,789 | 2,841 | |||||||||
Total debt | 880,344 | 881,266 | |||||||||
Current ratio | 1.30 | 1.04 |
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(in thousands) | Balance | Maturity Date | Rate (1) | |||||
Capital lease | $ | 344 | April 12, 2010 | 7.4% | ||||
Revolving credit facility | — | December 31, 2013 | LIBOR plus 2.75% | |||||
Term loan | $ | 880,000 | December 31, 2014 | LIBOR plus 2.50% |
(1) | As of December 31, 2009, the 1-month LIBOR rate in effect on our borrowings was 0.23%. |
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Payments due or expiring by period | ||||||||||||||||||||
Less Than 1 | More than 5 | |||||||||||||||||||
(In thousands) | Total | year | 1-3 years | 3-5 years | years | |||||||||||||||
Contractual obligations: | ||||||||||||||||||||
Term loan and associated interest (a) | $ | 1,142,240 | $ | 52,448 | $ | 104,896 | $ | 984,896 | $ | — | ||||||||||
Capital lease | 344 | 344 | — | — | — | |||||||||||||||
Operating leases | 6,514 | 3,151 | 2,301 | 652 | 410 | |||||||||||||||
Interest rate swaps | 32,179 | 6,074 | 17,094 | 9,011 | — | |||||||||||||||
Other (b) | 2,590 | 1,438 | 952 | 133 | �� | 67 | ||||||||||||||
Total Contractual obligations | $ | 1,183,867 | $ | 63,455 | $ | 125,243 | $ | 994,692 | $ | 477 | ||||||||||
(a) | These items consist of interest and principal payments under our credit facilities. The credit facilities consist of a $760.0 million term loan facility and a $120.0 million DDTL facility, both maturing on December 31, 2014, and a $50.0 million revolving credit facility, which was fully available but undrawn as of December 31, 2009. For purposes of this table, we assumed a fixed interest rate of 5.96% throughout the entire term of the loan, which was the average rate in effect during the fourth quarter of 2009. The actual rate will vary depending on the LIBO rates in effect at the time of payment and the expiration dates of the swap agreements. | |
(b) | Represents payments for four operational support systems obligations. Should we terminate any of the contracts prior to their expiration, we will be liable for minimum commitment payments as defined in the contracts for the remaining term of the contracts. In addition, we have a contractual obligation for network maintenance. |
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Consolidated Communications Holdings, Inc.
/s/ Ernst & Young LLP |
March 8, 2010
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(a) | Index to exhibits, financial statements and schedules. |
(1) | The following consolidated financial statements and reports are included beginning on page F-1 hereof: | ||
Reports of Independent Registered Public Accounting Firm. | |||
Consolidated Statements of Operations — For the years ended December 31, 2009, 2008, and 2007. | |||
Consolidated Balance Sheets — December 31, 2009 and 2008. | |||
Consolidated Statements of Changes in Stockholders’ Equity — For the years ended December 31, 2009, 2008, and 2007. | |||
Consolidated Statements of Cash Flows — For the years ended December 31, 2009, 2008, and 2007. | |||
Notes to Consolidated Financial Statements. | |||
Report of Independent Registered Public Accounting Firm. | |||
Pennsylvania RSA 6(II) Limited Partnership Balance Sheets — December 31, 2009 and 2008. | |||
Pennsylvania RSA 6(II) Limited Partnership Statements of Operations — For the years ended December 31, 2009, 2008 and 2007. | |||
Pennsylvania RSA 6(II) Limited Partnership Statements of Changes in Partners’ Capital — For the years ended December 31, 2009, 2008 and 2007. | |||
Pennsylvania RSA 6(II) Limited Partnership Statements of Cash Flows — For the years ended December 31, 2009, 2008 and 2007. | |||
Notes to Consolidated Financial Statements. | |||
Report of Independent Registered Public Accounting Firm. | |||
GTE Mobilnet of Texas #17 Limited Partnership Balance Sheets — December 31, 2009 and 2008. | |||
GTE Mobilnet of Texas #17 Limited Partnership Statements of Operations — For the years ended December 31, 2009, 2008 and 2007. | |||
GTE Mobilnet of Texas #17 Limited Partnership Statements of Changes in Partners’ Capital — For the years ended December 31, 2009, 2008 and 2007. | |||
GTE Mobilnet of Texas #17 Limited Partnership Statements of Cash Flows — For the years ended December 31, 2009, 2008 and 2007. | |||
Notes to Consolidated Financial Statements. | |||
(2) | The following consolidated financial statement schedule of the Company is included on page F-43 hereof: |
SCHEDULE II Valuation and Qualifying Accounts |
(3) | Exhibits required by Item 601 of Regulation S-K: |
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Exhibit | ||||
Number | Description | |||
2.1 | Agreement and Plan of Merger, dated as of July 1, 2007, by and among Consolidated Communications Holdings, Inc., North Pittsburgh Systems, Inc. and Fort Pitt Acquisition Sub Inc. (incorporated by reference to Exhibit 2.1 to Current Report on Form 8-K dated July 12, 2007). | |||
3.1 | Form of Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to Amendment No. 7 to Form S-1 dated July 19, 2005). | |||
3.2 | Form of Amended and Restated Bylaws, as amended (incorporated by reference to Exhibit 3.1 to Form 10-Q for the period ended September 30, 2009). | |||
4.1 | Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 to Amendment No. 7 to Form S-1 dated July 19, 2005). | |||
10.1 | Credit Agreement, dated December 31, 2007, among Consolidated Communications Holdings, Inc., as Parent Guarantor, Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and Fort Pitt Acquisition Sub Inc., as Co-Borrowers, the lenders referred to therein, Wachovia Bank, National Association, as administrative agent, issuing bank and swingline lender, CoBank, ACB, as syndication agent, General Electric Capital Corporation, as co-documentation agent, The Royal Bank of Scotland PLC, as co-documentation agent, and Wachovia Capital Markets, LLC, as sole lead arranger and sole bookrunner (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K dated December 31, 2007). | |||
10.2 | Form of Collateral Agreement, dated December 31, 2007, by and among Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc., Fort Pitt Acquisition Sub Inc., certain subsidiaries of Consolidated Communications Holdings, Inc. identified on the signature pages thereto, in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.2 to Form 10-K for the period ended December 31, 2007). | |||
10.3 | Form of Guaranty Agreement, dated December 31, 2007, made by Consolidated Communications Holdings, Inc. and certain subsidiaries of Consolidated Communications Holdings, Inc. identified on the signature pages thereto, in favor of Wachovia Bank, National Association, as Administrative Agent (incorporated by reference to Exhibit 10.3 to Form 10-K for the period ended December 31, 2007). | |||
10.4 | Lease Agreement, dated December 31, 2002, between LATEL, LLC and Consolidated Market Response, Inc. (incorporated by reference to Exhibit 10.11 to Form S-4 dated October 26, 2004). | |||
10.5 | Lease Agreement, dated December 31, 2002, between LATEL, LLC and Illinois Consolidated Telephone Company (incorporated by reference to Exhibit 10.12 to Form S-4 dated October 26, 2004). | |||
10.6 | Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company (incorporated by reference to Exhibit 10.13 to Form S-4 dated October 26, 2004). | |||
10.6.1 | Amendment No. 1 to Master Lease Agreement, dated February 25, 2002, between General Electric Capital Corporation and TXU Communications Ventures Company, dated March 18, 2002 (incorporated by reference to Exhibit 10.14 to Form S-4 dated October 26, 2004). | |||
10.8 | Amended and Restated Consolidated Communications Holdings, Inc. Restricted Share Plan (incorporated by reference to Exhibit 10.11 to Amendment No. 7 to Form S-1 dated July 19, 2005). |
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Exhibit | ||||
Number | Description | |||
10.9 | * | Consolidated Communications Holdings, Inc. 2005 Long-Term Incentive Plan (As Amended and Restated Effective May 5, 2009) (incorporated by reference to Exhibit A to the Company’s 2009 Proxy Statement for the Annual Meeting held on May 5, 2009). | ||
10.10 | Stock Repurchase Agreement, dated July 13, 2006, by and among Consolidated Communications Holdings, Inc., Providence Equity Partners IV L.P. and Providence Equity Operating Partners IV L.P. (incorporated by reference to Exhibit 10.1 to Form 8-K dated July 17, 2006). | |||
10.11 | * | Form of Employment Security Agreement with Robert J. Currey (incorporated by reference to Exhibit 10.1 to Form 8-K dated December 4, 2009). | ||
10.12 | * | Form of Employment Security Agreement with certain of the Company’s other executive officers (incorporated by reference to Exhibit 10.2 to Form 8-K dated December 4, 2009). | ||
10.13 | * | Form of Employment Security Agreement with the Company’s and its subsidiaries vice president and director level employees (incorporated by reference to Exhibit 10.12 to Form 10-K for the period ended December 31, 2007). | ||
10.14 | * | Executive Long-Term Incentive Program, as revised March 12, 2007 (incorporated by reference to Exhibit 10.1 to Form 8-K dated March 12, 2007). | ||
10.15 | Form of 2005 Long-Term Incentive Plan Performance Stock Grant Certificate (incorporated by reference to Exhibit 10.2 to Form 8-K dated March 12, 2007). | |||
10.16 | Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate (incorporated by reference to Exhibit 10.3 to Form 8-K dated March 12, 2007). | |||
10.17 | * | Form of 2005 Long-Term Incentive Plan Restricted Stock Grant Certificate for Directors (incorporated by reference to Exhibit 10.4 to Form 8-K dated March 12, 2007). | ||
10.18 | * | Description of the Consolidated Communications Holdings, Inc. Bonus Plan (incorporated by reference to Exhibit 10.5 to Form 8-K dated March 12, 2007). | ||
10.19 | Letter Agreement, dated March 31, 2008, by Wachovia Bank, National Association, and agreed to and acknowledged by Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and North Pittsburgh Systems, Inc. (formerly known as Fort Pitt Acquisition Sub Inc.) (incorporated by reference to Exhibit 10.1 to Form 8-K dated March 31, 2008). | |||
10.20 | Letter Agreement dated August 6, 2008 by Wachovia Bank, National Association, and agreed to and acknowledged by Consolidated Communications Holdings, Inc., Consolidated Communications, Inc., Consolidated Communications Acquisition Texas, Inc. and North Pittsburgh Systems, Inc. (formerly known as Fort Pitt Acquisition Sub Inc.) (incorporated by reference to Exhibit 10.1 to Form 10-Q for the period ended June 30, 2008). | |||
21.1 | List of subsidiaries of the Registrant | |||
23.1 | Consent of Ernst & Young LLP | |||
23.2 | Consent of Deloitte & Touché LLP | |||
31.1 | Certificate of Chief Executive Officer of Consolidated Communications Holdings, Inc. pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934 | |||
31.2 | Certificate of Chief Financial Officer of Consolidated Communications Holdings, Inc. pursuant to Rule 13(a)-14(a) under the Securities Exchange Act of 1934 | |||
32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
* | Compensatory plan or arrangement. |
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CONSOLIDATED COMMUNICATIONS HOLDINGS, INC. | ||||
By: | /s/ Robert J. Currey | |||
Name: | Robert J. Currey | |||
Title: | President and Chief Executive Officer |
Signature | Title | Date | ||||
By: | /s/ Robert J. Currey | President and Chief Executive Officer and Director (Principal Executive Officer) | March 8, 2010 | |||
By: | /s/ Steven L. Childers | Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) | March 8, 2010 | |||
By: | /s/ Richard A. Lumpkin | Non-Executive Chairman of the Board and Director | March 8, 2010 | |||
By: | /s/ Jack W. Blumenstein | Director | March 8, 2010 | |||
By: | /s/ Roger H. Moore | Director | March 8, 2010 | |||
By: | /s/ Maribeth S. Rahe | Director | March 8, 2010 |
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Consolidated Communications Holdings, Inc.
March 8, 2010
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F-2
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Year ended December 31, | ||||||||||||
(In thousands except per share amounts) | 2009 | 2008 | 2007 | |||||||||
Net revenues | $ | 406,167 | $ | 418,424 | $ | 329,248 | ||||||
Operating expense: | ||||||||||||
Cost of services and products (exclusive of depreciation and amortization shown separately below) | 145,460 | 143,563 | 107,290 | |||||||||
Selling, general and administrative expenses | 104,774 | 108,769 | 89,662 | |||||||||
Intangible asset impairment | — | 6,050 | — | |||||||||
Depreciation and amortization | 85,227 | 91,678 | 65,659 | |||||||||
Operating income | 70,706 | 68,364 | 66,637 | |||||||||
Other income (expense): | ||||||||||||
Interest income | 56 | 367 | 893 | |||||||||
Interest expense | (57,991 | ) | (66,659 | ) | (47,350 | ) | ||||||
Investment income | 25,770 | 20,495 | 7,034 | |||||||||
Loss on early extinguishment of debt | — | (9,224 | ) | (10,323 | ) | |||||||
Other, net | (207 | ) | (577 | ) | (167 | ) | ||||||
Income before income taxes and extraordinary item | 38,334 | 12,766 | 16,724 | |||||||||
Income tax expense | 12,399 | 6,639 | 4,674 | |||||||||
Income before extraordinary item | 25,935 | 6,127 | 12,050 | |||||||||
Extraordinary item (net of income tax of $4,154) | — | 7,240 | — | |||||||||
Net income | 25,935 | 13,367 | 12,050 | |||||||||
Less: Net income attributable to noncontrolling interest | 1,030 | 863 | 627 | |||||||||
Net income attributable to common stockholders | $ | 24,905 | $ | 12,504 | $ | 11,423 | ||||||
Net income per common share attributable to common stockholders—basic: | ||||||||||||
Income per common share before extraordinary item | $ | 0.84 | $ | 0.18 | $ | 0.43 | ||||||
Extraordinary item per share | — | 0.24 | — | |||||||||
Net income per common share attributable to common stockholders—basic | $ | 0.84 | $ | 0.42 | $ | 0.43 | ||||||
Net income per common share attributable to common stockholders—diluted: | ||||||||||||
Income per common share before extraordinary item | $ | 0.84 | $ | 0.18 | $ | 0.43 | ||||||
Extraordinary item per share | — | 0.24 | — | |||||||||
Net income per common share attributable to common stockholders—diluted | $ | 0.84 | $ | 0.42 | $ | 0.43 | ||||||
Cash dividends per common share | $ | 1.55 | $ | 1.55 | $ | 1.55 | ||||||
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December 31, | ||||||||
(In thousands except share and per share amounts) | 2009 | 2008 | ||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and equivalents | $ | 42,758 | $ | 15,471 | ||||
Accounts receivable, net of allowance for doubtful accounts of $1,796 in 2009 and $1,908 in 2008 | 42,125 | 45,092 | ||||||
Inventories | 6,874 | 7,482 | ||||||
Deferred income taxes | 5,970 | 3,600 | ||||||
Prepaid expenses and other current assets | 6,639 | 6,931 | ||||||
Total current assets | 104,366 | 78,576 | ||||||
Property, plant and equipment, net | 377,200 | 400,286 | ||||||
Investments | 98,748 | 95,657 | ||||||
Goodwill | 520,562 | 520,562 | ||||||
Customer lists, net | 102,088 | 124,249 | ||||||
Tradenames | 13,446 | 14,291 | ||||||
Deferred debt issuance costs, net and other assets | 6,633 | 8,005 | ||||||
Total assets | $ | 1,223,043 | $ | 1,241,626 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 13,482 | $ | 12,336 | ||||
Advance billings and customer deposits | 20,025 | 19,102 | ||||||
Dividends payable | 11,476 | 11,388 | ||||||
Accrued expense | 26,268 | 24,584 | ||||||
Current portion of capital lease obligations | 344 | 922 | ||||||
Current portion of derivative liability | 6,074 | 4,443 | ||||||
Current portion of pension and postretirement benefit obligations | 2,908 | 2,960 | ||||||
Total current liabilities | 80,577 | 75,735 | ||||||
Long-term portion of capital lease obligation | — | 344 | ||||||
Senior secured long-term debt | 880,000 | 880,000 | ||||||
Deferred income taxes | 74,711 | 58,134 | ||||||
Pension and other postretirement obligations | 80,298 | 107,741 | ||||||
Other long-term liabilities | 26,740 | 44,387 | ||||||
Total liabilities | 1,142,326 | 1,166,341 | ||||||
Stockholders’ equity: | ||||||||
Common stock, par value $0.01 per share; 100,000,000 shares authorized, 29,608,653 and 29,488,408, shares outstanding as of December 31, 2009 and 2008, respectively | 296 | 295 | ||||||
Additional paid-in capital | 109,746 | 129,284 | ||||||
Retained earnings | — | — | ||||||
Accumulated other comprehensive loss, net | (35,540 | ) | (59,479 | ) | ||||
Noncontrolling interest | 6,215 | 5,185 | ||||||
Total stockholders’ equity | 80,717 | 75,285 | ||||||
Total liabilities and stockholders’ equity | $ | 1,223,043 | $ | 1,241,626 | ||||
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Accumulated | ||||||||||||||||||||||||||||
Additional | Other | Non- | ||||||||||||||||||||||||||
Common Stock | Paid in | Retained | Comprehensive | controlling | ||||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (loss) | Interest | Total | ||||||||||||||||||||||
Balance, January 1, 2007 | 26,001,872 | $ | 260 | $ | 112,496 | $ | — | $ | 2,202 | $ | 3,695 | $ | 118,653 | |||||||||||||||
Dividends on common stock | — | (30,090 | ) | (11,423 | ) | — | — | (41,513 | ) | |||||||||||||||||||
Issuance of common stock | 3,319,142 | 34 | 74,376 | — | — | — | 74,410 | |||||||||||||||||||||
Shares issued under employee plan, net of forfeitures | 126,834 | |||||||||||||||||||||||||||
Non-cash, stock-based compensation | — | 4.034 | — | — | — | 4,034 | ||||||||||||||||||||||
Purchase and retirement of common stock | (7,261 | ) | — | (131 | ) | — | — | — | (131 | ) | ||||||||||||||||||
Tax on restricted stock vesting | — | 38 | — | — | — | 38 | ||||||||||||||||||||||
Comprehensive income: | — | — | — | — | — | |||||||||||||||||||||||
Net income | — | — | 11,423 | — | 627 | 12,050 | ||||||||||||||||||||||
Recognition of funded status of pension and other postretirement plans, net of tax of $1,606 | — | — | — | 2,785 | — | 2,785 | ||||||||||||||||||||||
Change in fair value of cash flow hedges, net of tax of $(6,139) | — | — | — | (10,638 | ) | — | (10,638 | ) | ||||||||||||||||||||
Total comprehensive income | 4,197 | |||||||||||||||||||||||||||
Balance, December 31, 2007 | 29,440,587 | $ | 294 | $ | 160,723 | $ | — | $ | (5,651 | ) | $ | 4,322 | $ | 159,688 | ||||||||||||||
Effects of accounting change regarding postretirement plan measurement dates pursuant to accounting guidance: | ||||||||||||||||||||||||||||
Service cost, interest cost and expected return on plan assets for October 1, 2007 through December 31, 2007, net of tax of $(88) | — | — | (154 | ) | — | — | (154 | ) | ||||||||||||||||||||
Amortization of prior service costs and net loss for October 1, 2007 through December 31, 2007, net of tax of $(9) | — | — | (15 | ) | 15 | — | — | |||||||||||||||||||||
Balance, January 1, 2008 | 29,440,587 | $ | 294 | $ | 160,723 | $ | (169 | ) | $ | (5,636 | ) | $ | 4,322 | $ | 159,534 | |||||||||||||
Dividends on common stock | — | (33,141 | ) | (12,335 | ) | — | — | (45,476 | ) | |||||||||||||||||||
Shares issued under employee plan, net of forfeitures | 71,467 | — | — | — | — | — | — | |||||||||||||||||||||
Non-cash, stock-based compensation | 1 | 1,900 | — | — | — | 1,901 | ||||||||||||||||||||||
Purchase and retirement of common stock | (23,646 | ) | — | (257 | ) | — | — | — | (257 | ) | ||||||||||||||||||
Tax on restricted stock vesting | — | (38 | ) | — | — | — | (38 | ) | ||||||||||||||||||||
Pension tax adjustment | — | 97 | — | — | — | 97 | ||||||||||||||||||||||
Comprehensive (loss): | ||||||||||||||||||||||||||||
Net income | — | — | 12,504 | — | 863 | 13,367 | ||||||||||||||||||||||
Change in prior service cost and net loss, net of tax of $(18,730) | — | — | — | (31,765 | ) | — | (31,765 | ) | ||||||||||||||||||||
Change in fair value of cash flow hedges, net of tax of $(12,666) | — | — | — | (22,078 | ) | — | (22,078 | ) | ||||||||||||||||||||
Total comprehensive loss | (40,476 | ) | ||||||||||||||||||||||||||
Balance, December 31, 2008 | 29,488,408 | $ | 295 | $ | 129,284 | $ | — | $ | (59,479 | ) | $ | 5,185 | $ | 75,285 | ||||||||||||||
Dividends on common stock | — | (21,021 | ) | (24,905 | ) | — | — | (45,926 | ) | |||||||||||||||||||
Shares issued under employee plan, net of forfeitures | 154,752 | 1 | — | — | — | — | 1 | |||||||||||||||||||||
Non-cash, stock-based compensation | — | 1,927 | — | — | — | 1,927 | ||||||||||||||||||||||
Purchase and retirement of common stock | (34,507 | ) | — | (545 | ) | — | — | — | (545 | ) | ||||||||||||||||||
Tax on restricted stock vesting | — | 198 | — | — | — | 198 | ||||||||||||||||||||||
Pension tax adjustment | — | (97 | ) | — | — | — | (97 | ) | ||||||||||||||||||||
Comprehensive income (loss): | ||||||||||||||||||||||||||||
Net income | — | — | 24,905 | — | 1,030 | 25,935 | ||||||||||||||||||||||
Change in prior service cost and net loss, net of tax of $8,345 | — | — | — | 14,022 | — | 14,022 | ||||||||||||||||||||||
Change in fair value of cash flow hedges, net of tax of $5,707 | — | — | — | 9,917 | — | 9,917 | ||||||||||||||||||||||
Total comprehensive income | 49,874 | |||||||||||||||||||||||||||
Balance, December 31, 2009 | 29,608,653 | $ | 296 | $ | 109,746 | $ | — | $ | (35,540 | ) | $ | 6,215 | $ | 80,717 | ||||||||||||||
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Year ended December 31, | ||||||||||||
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Operating Activities | ||||||||||||
Net income | $ | 25,935 | $ | 13,367 | $ | 12,050 | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 85,227 | 91,678 | 65,659 | |||||||||
Loss on extinguishment of debt | — | 9,224 | 10,323 | |||||||||
Deferred income taxes | 57 | (12,032 | ) | (4,271 | ) | |||||||
Intangible asset impairment | — | 6,050 | — | |||||||||
Extraordinary item, net of tax | — | (7,240 | ) | — | ||||||||
Loss on disposal of assets | 2,491 | — | — | |||||||||
Non-cash partnership income | (3,091 | ) | (2,056 | ) | (333 | ) | ||||||
Stock-based compensation expense | 1,927 | 1,901 | 4,034 | |||||||||
Amortization of deferred financing costs | 1,301 | 1,431 | 3,128 | |||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable, net | 2,967 | (1,091 | ) | 171 | ||||||||
Inventories | 608 | (1,118 | ) | (228 | ) | |||||||
Other assets | 363 | 5,083 | 5,544 | |||||||||
Accounts payable | 1,146 | (5,050 | ) | 1,258 | ||||||||
Accrued expenses and other liabilities | (2,624 | ) | (7,736 | ) | (15,266 | ) | ||||||
Net cash provided by operating activities | 116,307 | 92,411 | 82,069 | |||||||||
Investing Activities | ||||||||||||
Additions to property, plant and equipment, net | (42,352 | ) | (48,027 | ) | (33,495 | ) | ||||||
Proceeds from the sale of investments | 725 | — | 10,625 | |||||||||
Securities purchased | — | — | (10,625 | ) | ||||||||
Acquisition, net of cash acquired | — | — | (271,780 | ) | ||||||||
Net cash used for investing activities | (41,627 | ) | (48,027 | ) | (305,275 | ) | ||||||
Financing Activities | ||||||||||||
Proceeds from issuance of stock | — | — | 12 | |||||||||
Proceeds from long-term obligations | — | 120,000 | 760,000 | |||||||||
Payments made on long-term obligations | — | (136,337 | ) | (464,000 | ) | |||||||
Repayment of North Pittsburgh long-term obligations | — | — | (15,426 | ) | ||||||||
Costs paid to issue common stock | — | — | (400 | ) | ||||||||
Payment of deferred financing costs | — | (240 | ) | (8,988 | ) | |||||||
Payment of capital lease obligation | (922 | ) | (971 | ) | — | |||||||
Repurchase and retirement of common stock | (545 | ) | (257 | ) | (131 | ) | ||||||
Dividends on common stock | (45,926 | ) | (45,449 | ) | (40,192 | ) | ||||||
Net cash provided by (used for) financing activities | (47,393 | ) | (63,254 | ) | 230,875 | |||||||
Net increase (decrease) in cash and equivalents | 27,287 | (18,870 | ) | 7,669 | ||||||||
Cash and equivalents at beginning of year | 15,471 | 34,341 | 26,672 | |||||||||
Cash and equivalents at end of year | $ | 42,758 | $ | 15,471 | $ | 34,341 | ||||||
Supplemental disclosure of cash flow: | ||||||||||||
Interest paid | $ | 56,026 | $ | 65,061 | $ | 44,343 | ||||||
Income taxes paid | $ | 10,996 | $ | 13,540 | $ | 13,976 |
F-6
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F-7
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F-8
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F-9
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F-10
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Years | ||||
Buildings | 18–40 | |||
Network and outside plant facilities | 3–50 | |||
Furniture, fixtures and equipment | 3–15 | |||
Capital leases | 11 |
F-11
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F-12
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F-13
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F-14
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(In thousands) | ||||
Current assets | $ | 17,729 | ||
Property, plant and equipment | 116,308 | |||
Customer lists | 49,000 | |||
Goodwill | 214,562 | |||
Investments and other assets | 53,360 | |||
Liabilities assumed | (103,933 | ) | ||
Net purchase price | $ | 347,026 | ||
F-15
Table of Contents
December 31, | ||||
(in thousands, except per share amounts) | 2007 | |||
Total revenues | $ | 424,917 | ||
Income from operations | 59,752 | |||
Pro forma net income | 5,592 | |||
Income per share — basic | 0.19 | |||
Income per share — diluted | 0.19 |
F-16
Table of Contents
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Fees charged from First Mid-Illinois for: | ||||||||||||
Banking services | $ | 10 | $ | 11 | $ | 10 | ||||||
401K plan administration | 11 | 65 | 81 | |||||||||
Interest income earned on deposits at First Mid-Illinois | 6 | 48 | 174 | |||||||||
Fees charged to first Mid-Illinois for telecommunication services | 456 | 482 | 465 |
(in thousands) | 2009 | 2008 | ||||||
Prepaid expenses | $ | 5,866 | $ | 5,913 | ||||
Deferred charges | 718 | 981 | ||||||
Other current assets | 55 | 37 | ||||||
Total | $ | 6,639 | $ | 6,931 | ||||
(in thousands) | 2009 | 2008 | ||||||
Land and buildings | $ | 66,700 | $ | 65,840 | ||||
Network and outside plant facilities | 833,879 | 808,886 | ||||||
Furniture, fixtures and equipment | 80,315 | 83,889 | ||||||
Assets under capital lease | 5,144 | 5,144 | ||||||
Less: accumulated depreciation | (617,141 | ) | (574,013 | ) | ||||
368,897 | 389,746 | |||||||
Construction in progress | 8,303 | 10,540 | ||||||
Totals | $ | 377,200 | $ | 400,286 | ||||
F-17
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(in thousands) | 2009 | 2008 | ||||||
Cash surrender value of life insurance policies | $ | 1,797 | $ | 1,779 | ||||
Cost method investments: | ||||||||
GTE Mobilnet of South Texas Limited Partnership (2.34%) | 21,450 | 21,450 | ||||||
Pittsburgh SMSA Limited Partnership (3.60%) | 22,950 | 22,950 | ||||||
CoBank, ACB Stock | 2,917 | 2,651 | ||||||
Other | 45 | 10 | ||||||
Equity method investments: | ||||||||
GTE Mobilnet of Texas RSA #17 Limited Partnership (17.02% interest) | 19,080 | 17,116 | ||||||
Pennsylvania RSA 6(I) Limited Partnership (16.6725% interest) | 7,301 | 7,276 | ||||||
Pennsylvania RSA 6(II) Limited Partnership (23.67% interest) | 23,049 | 22,267 | ||||||
Boulevard Communications, LLP (50% interest) | 159 | 158 | ||||||
Total | $ | 98,748 | $ | 95,657 | ||||
F-18
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(in thousands) | 2009 | 2008 | 2007 | |||||||||
Total revenues | $ | 236,835 | $ | 212,498 | $ | 180,412 | ||||||
Income from operations | 65,565 | 50,479 | 41,682 | |||||||||
Income before taxes | 66,832 | 50,479 | 42,680 | |||||||||
Net income | 66,501 | 50,619 | 42,680 | |||||||||
Current assets | 47,894 | 33,586 | 31,049 | |||||||||
Non-current assets | 76,906 | 74,521 | 64,172 | |||||||||
Current liabilities | 11,035 | 8,937 | 8,869 | |||||||||
Non-current liabilities | 623 | 567 | 468 | |||||||||
Partnership equity | 113,260 | 98,603 | 85,885 |
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
In Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
Identical Assets | Inputs | Inputs | ||||||||||||||
Description | December 31, 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Interest rate swaps | $ | 32,179 | $ | — | $ | 32,179 | $ | — | ||||||||
Fair Value | ||||
Measurements | ||||
Using Significant | ||||
Unobservable | ||||
(In thousands) | Inputs (Level 3) | |||
Balance at December 31, 2008 | $ | 47,908 | ||
Settlements | (14,852 | ) | ||
Unrealized gain included in earnings | (62 | ) | ||
Unrealized gain included in other comprehensive income from basis swap | (1,361 | ) | ||
Unrealized loss included in other comprehensive income | 5,693 | |||
Transfers out of Level 3 | (37,326 | ) | ||
Balance at December 31, 2009 | $ | — | ||
Gain arising from ineffectiveness included in interest expense | $ | 107 | ||
F-19
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As of December 31, 2009 | As of December 31, 2008 | |||||||||||||||
(In thousands) | Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
Investments, equity basis | $ | 49,589 | n/a | $ | 46,817 | n/a | ||||||||||
Investments, at cost | $ | 47,362 | n/a | $ | 47,061 | n/a | ||||||||||
Long-term debt | $ | 880,000 | $ | 880,000 | $ | 880,000 | $ | 880,000 |
F-20
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Telephone | Other | |||||||||||
(In thousands) | Operations | Operations | Total | |||||||||
Balance at December 31, 2007 | $ | 519,355 | $ | 7,084 | $ | 526,439 | ||||||
Adjustment to purchase of North Pittsburgh | 173 | — | 173 | |||||||||
Impairment | — | (6,050 | ) | (6,050 | ) | |||||||
Balance at December 31, 2008 | $ | 519,528 | $ | 1,034 | $ | 520,562 | ||||||
Balance at December 31, 2009 | $ | 519,528 | $ | 1,034 | $ | 520,562 | ||||||
Telephone Operations | Other Operations | |||||||||||||||
(In thousands) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Gross carrying amount | $ | 193,124 | $ | 193,124 | $ | 11,712 | $ | 12,524 | ||||||||
Less: accumulated amortization | (92,358 | ) | (70,660 | ) | (10,390 | ) | (10,739 | ) | ||||||||
Net carrying amount | $ | 100,766 | $ | 122,464 | $ | 1,322 | $ | 1,785 | ||||||||
F-21
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(in thousands) | ||||
2010 | $ | 22,139 | ||
2011 | 22,139 | |||
2012 | 22,139 | |||
2013 | 8,323 | |||
2014 | 8,323 | |||
2015 | 8,323 | |||
2016 | 8,323 | |||
2017 | 2,379 | |||
Total | $ | 102,088 | ||
(in thousands) | 2009 | 2008 | ||||||
Deferred debt issuance costs, net | $ | 6,464 | $ | 7,765 | ||||
Other assets | 169 | 240 | ||||||
Total | $ | 6,633 | $ | 8,005 | ||||
(In thousands) | 2009 | 2008 | ||||||
Salaries and employee benefits | $ | 11,727 | $ | 9,453 | ||||
Taxes payable | 7,766 | 6,004 | ||||||
Accrued interest | 1,177 | 785 | ||||||
Other accrued expenses | 5,598 | 8,342 | ||||||
Totals | $ | 26,268 | $ | 24,584 | ||||
F-22
Table of Contents
(In thousands) | 2009 | 2008 | ||||||
Senior secured credit facility — revolving loan | $ | — | $ | — | ||||
Senior secured credit facility — term loan | 880,000 | 880,000 | ||||||
Obligations under capital lease | 344 | 1,266 | ||||||
880,344 | 881,266 | |||||||
Less: current portion | (344 | ) | (922 | ) | ||||
Total long-term debt | $ | 880,000 | $ | 880,344 | ||||
(In thousands) | ||||
2010 | $ | — | ||
2011 | — | |||
2012 | — | |||
2013 | — | |||
2014 | 880,000 | |||
$ | 880,000 | |||
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F-24
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Fair Value | ||||||||
December 31, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Current portion of derivative liability | $ | 6,074 | $ | 4,443 | ||||
Other liabilities | 26,105 | 43,465 |
For the Twelve Months | ||||||||
Ended December 31, | ||||||||
(In thousands) | 2009 | 2008 | ||||||
Loss reclassified from OCI into interest expense (effective portion) | $ | 11,050 | $ | 6,377 | ||||
Loss (gain) arising from ineffectiveness included in interest expense | (107 | ) | 395 |
F-25
Table of Contents
Year Ended December 31, | ||||||||||||
(in thousands) | 2009 | 2008 | 2007 | |||||||||
Interest expense — credit facility | $ | 25,443 | $ | 49,656 | $ | 33,488 | ||||||
Interest expense — high-yield debt | — | 3,204 | 12,675 | |||||||||
Payments on swap liabilities, net | 29,918 | 10,524 | (2,624 | ) | ||||||||
Other interest | 1,475 | 2,072 | 804 | |||||||||
Amortization of deferred financing fees | 1,273 | 1,431 | 3,128 | |||||||||
Capitalized interest | (118 | ) | (228 | ) | (121 | ) | ||||||
Total interest expense | $ | 57,991 | $ | 66,659 | $ | 47,350 | ||||||
2009 | 2008 | |||||||
Equity securities | 61.8 | % | 52.2 | % | ||||
Debt securities | 35.0 | 44.2 | ||||||
Cash and equivalents | 3.2 | 3.6 | ||||||
Total | 100.0 | % | 100.0 | % | ||||
F-26
Table of Contents
Fair Value Measurements at Reporting Date Using | ||||||||||||||||
Quoted Prices | Significant | |||||||||||||||
In Active | Other | Significant | ||||||||||||||
Markets for | Observable | Unobservable | ||||||||||||||
December 31, | Identical Assets | Inputs | Inputs | |||||||||||||
(in thousands) | 2009 | (Level 1) | (Level 2) | (Level 3) | ||||||||||||
Cash equivalents: | ||||||||||||||||
Money market | $ | 4,508 | $ | 4,508 | — | — | ||||||||||
Equities: | ||||||||||||||||
U.S. common stocks | 51,864 | 51,864 | — | — | ||||||||||||
International stocks | 25,003 | 25,003 | — | — | ||||||||||||
Stock funds | 10,843 | — | 10,843 | — | ||||||||||||
Fixed Income: | ||||||||||||||||
Government agency | 8,729 | 8,729 | — | — | ||||||||||||
U.S. corporate bonds | 41,034 | 41,034 | — | — | ||||||||||||
Total | $ | 141,981 | $ | 131,138 | 10,843 | — | ||||||||||
(In thousands) | 2009 | 2008 | ||||||
Funded (Unfunded) status | $ | (42,924 | ) | $ | (68,616 | ) | ||
Amounts recognized in | ||||||||
Long-term liabilities | (42,924 | ) | (68,616 | ) | ||||
Deferred taxes | 10,458 | 18,625 | ||||||
Accumulated other comprehensive loss: | ||||||||
Unamortized prior service credit | (260 | ) | (288 | ) | ||||
Unamortized net actuarial loss | 17,821 | 31,596 |
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(In thousands) | 2009 | 2008 | 2007 | |||||||||
Service cost | $ | 2,109 | $ | 2,120 | $ | 1,802 | ||||||
Interest cost | 11,099 | 11,004 | 7,324 | |||||||||
Expected return on plan assets | (9,422 | ) | (12,690 | ) | (8,035 | ) | ||||||
Net amortization loss | 2,673 | — | — | |||||||||
Prior service credit amortization | (43 | ) | (13 | ) | (13 | ) | ||||||
Net periodic pension cost | $ | 6,416 | $ | 421 | $ | 1,078 | ||||||
2009 | 2008 | 2007 | ||||||||||
Discount rate | 6.23 | % | 6.12 | % | 6.30 | % | ||||||
Expected long-term rate of return on plan assets | 7.70 | % | 8.00 | % | 8.00 | % | ||||||
Rate of compensation/salary increase | 3.16 | % | 3.73 | % | 3.50 | % |
(In thousands) | 2009 | 2008 | ||||||
Benefit obligation at the beginning of the year | $ | 187,065 | $ | 181,197 | ||||
Service costs | 2,109 | 2,120 | ||||||
Interest costs | 11,099 | 11,004 | ||||||
Actuarial (gain) loss | (3,183 | ) | 3,448 | |||||
Termination benefits and settlements | — | 49 | ||||||
Service cost adjustment to retained earnings | — | 202 | ||||||
Interest cost adjustment to retained earnings | — | 976 | ||||||
Plan amendments | — | (320 | ) | |||||
Benefits paid | (12,186 | ) | (11,611 | ) | ||||
Benefit obligation at the end of the year | $ | 184,904 | $ | 187,065 | ||||
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(In thousands) | 2009 | 2008 | ||||||
Fair value of plan assets at the beginning of the year | $ | 118,449 | $ | 166,639 | ||||
Employer contributions | 10,447 | 215 | ||||||
Actual return on plan assets | 25,271 | (36,794 | ) | |||||
Benefits paid | (12,186 | ) | (11,611 | ) | ||||
Fair value of plan assets at the end of the year | $ | 141,981 | $ | 118,449 | ||||
(in thousands) | ||||
2010 | $ | 12,404 | ||
2011 | 12,472 | |||
2012 | 12,637 | |||
2013 | 12,656 | |||
2014 | 12,646 | |||
2015 — 2019 | 64,791 |
(In thousands) | 2009 | 2008 | ||||||
Funded (Unfunded) status | $ | (954 | ) | $ | (967 | ) | ||
Amounts recognized in | ||||||||
Current liabilities | (53 | ) | (52 | ) | ||||
Long-term liabilities | (901 | ) | (915 | ) | ||||
Deferred taxes | 151 | 169 | ||||||
Accumulated other comprehensive loss: | ||||||||
Unamortized net actuarial loss | 261 | 293 |
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(In thousands) | 2009 | 2008 | 2007 | |||||||||
Service cost | $ | — | $ | — | $ | — | ||||||
Interest cost | 57 | 210 | 55 | |||||||||
Special termination benefits charge | — | 2 | — | |||||||||
Net amortization loss | 33 | 32 | 34 | |||||||||
Net periodic pension cost | $ | 90 | $ | 244 | $ | 89 | ||||||
2009 | 2008 | 2007 | ||||||||||
Discount rate | 6.23 | % | 6.08 | % | 6.30 | % |
(In thousands) | 2009 | 2008 | ||||||
Benefit obligation at the beginning of the year | $ | 967 | $ | 6,654 | ||||
Service costs | — | — | ||||||
Interest costs | 57 | 210 | ||||||
Actuarial (gain) loss | (17 | ) | 26 | |||||
Benefits paid | (53 | ) | (5,923 | ) | ||||
Benefit obligation at the end of the year | $ | 954 | $ | 967 | ||||
(In thousands) | 2009 | 2008 | ||||||
Fair value of plan assets at the beginning of the year | $ | — | $ | — | ||||
Employer contributions | 53 | 5,923 | ||||||
Benefits paid | (53 | ) | (5,923 | ) | ||||
Fair value of plan assets at the end of the year | $ | — | $ | — | ||||
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(in thousands) | ||||
2010 | $ | 53 | ||
2011 | 53 | |||
2012 | 53 | |||
2013 | 53 | |||
2014 | 53 | |||
2015 — 2019 | 270 |
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(In thousands) | 2009 | 2008 | ||||||
Unfunded status | $ | (36,214 | ) | $ | (37,723 | ) | ||
Amounts recognized in: | ||||||||
Current liabilities | (2,856 | ) | (2,908 | ) | ||||
Long-term liabilities | (33,358 | ) | (34,815 | ) | ||||
Deferred taxes | 1,645 | 1,485 | ||||||
Accumulated other comprehensive (income) loss: | ||||||||
Unamortized prior service credit | (1,430 | ) | (2,043 | ) | ||||
Unamortized net actuarial gain | (1,128 | ) | (107 | ) |
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Service cost | $ | 813 | $ | 900 | $ | 809 | ||||||
Interest cost | 2,146 | 2,421 | 1,527 | |||||||||
Net prior service cost amortization | (963 | ) | (638 | ) | (711 | ) | ||||||
Special termination benefits charge | 40 | — | ||||||||||
Net loss (gain) amortization | (22 | ) | — | 44 | ||||||||
Net periodic postretirement benefit cost | $ | 1,974 | $ | 2,723 | $ | 1,669 | ||||||
(In thousands) | 2009 | 2008 | ||||||
Benefit obligation at the beginning of the year | $ | 37,723 | $ | 40,895 | ||||
Service cost | 813 | 900 | ||||||
Interest cost | 2,146 | 2,420 | ||||||
Service cost adjustment to retained earnings | — | 72 | ||||||
Interest cost adjustment to retained earnings | — | 163 | ||||||
Post-measurement date contributions | — | (339 | ) | |||||
Plan participant contributions | 500 | 375 | ||||||
Special termination benefits and settlements | — | 41 | ||||||
Plan amendments | — | (3,724 | ) | |||||
Actuarial loss (gain) | (1,642 | ) | (207 | ) | ||||
Benefits paid | (3,326 | ) | (2,873 | ) | ||||
Benefit obligation at the end of the year | $ | 36,214 | $ | 37,723 | ||||
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(in thousands) | ||||
2010 | $ | 2,942 | ||
2011 | 3,116 | |||
2012 | 3,096 | |||
2013 | 2,986 | |||
2014 | 3,031 | |||
2015 — 2019 | 14,590 |
(In thousands) | 1% Increase | 1% Decrease | ||||||
Effect on total of service and interest cost components | $ | 251 | $ | (313 | ) | |||
Effect on postretirement benefit obligation | $ | 3,097 | $ | (2,702 | ) |
Year Ended December 31, | ||||||||||||
(in millions) | 2009 | 2008 | 2007 | |||||||||
Restricted stock | $ | 1.1 | $ | 1.1 | $ | 3.6 | ||||||
Performance shares | 0.8 | 0.8 | 0.4 | |||||||||
Total | $ | 1.9 | $ | 1.9 | $ | 4.0 | ||||||
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Average Remaining | ||||||||
Non-recognized | Recognition Period | |||||||
(in millions) | Compensation | (years) | ||||||
Restricted stock | $ | 0.9 | 1.4 | |||||
Performance shares | 0.9 | 2.5 | ||||||
Total | $ | 1.8 | 1.8 | |||||
2009 | 2008 | 2007 | ||||||||||||||||||||||
# of | # of | # of | ||||||||||||||||||||||
Shares | Price(1) | Shares | Price(1) | Shares | Price(1) | |||||||||||||||||||
Non-vested restricted shares outstanding — January 1 | 74,391 | $ | 16.62 | 122,367 | $ | 17.07 | 248,745 | $ | 12.95 | |||||||||||||||
Shares granted | 96,447 | 9.05 | 14,750 | 14.92 | 127,334 | 19.99 | ||||||||||||||||||
Shares vested | (64,499 | ) | 12.65 | (48,016 | ) | 16.95 | (237,792 | ) | 18.08 | |||||||||||||||
Shares forfeited, cancelled or retired | (23,964 | ) | 12.44 | (14,710 | ) | 17.57 | (15,920 | ) | 13.66 | |||||||||||||||
Non-vested restricted shares outstanding — December 31 | 82,375 | $ | 12.08 | 74,391 | $ | 16.62 | 122,367 | $ | 17.07 | |||||||||||||||
(1) | Represents the weighted—average fair value on date of grant. |
2009 | 2008 | 2007 | ||||||||||||||||||||||
# of | # of | # of | ||||||||||||||||||||||
Shares | Price(1) | Shares | Price(1) | Shares | Price(1) | |||||||||||||||||||
Non-vested performance shares outstanding — January 1 | 31,137 | $ | 15.68 | 6,935 | $ | 20.01 | — | $ | — | |||||||||||||||
Shares granted | 61,544 | 9.05 | 56,717 | 14.92 | 9,250 | 20.01 | ||||||||||||||||||
Shares vested | (32,321 | ) | 10.89 | (23,579 | ) | 15.33 | (1,886 | ) | 20.01 | |||||||||||||||
Shares forfeited, cancelled or retired | (13,782 | ) | 10.67 | (8,936 | ) | 15.15 | (429 | ) | 20.01 | |||||||||||||||
Non-vested performance shares outstanding — December 31 | 46,578 | $ | 11.72 | 31,137 | $ | 15.68 | 6,935 | $ | 20.01 | |||||||||||||||
(1) | Represents the weighted—average fair value on date of grant. |
(In thousands) | 2009 | 2008 | 2007 | |||||||||
Current: | ||||||||||||
Federal | $ | 9,778 | $ | 12,519 | $ | 7,790 | ||||||
State | 2,564 | 6,152 | 1,155 | |||||||||
Deferred: | ||||||||||||
Federal | 2,266 | (9,650 | ) | (1,523 | ) | |||||||
State | (2,209 | ) | (2,382 | ) | (2,748 | ) | ||||||
Total income tax expense | $ | 12,399 | $ | 6,639 | $ | 4,674 | ||||||
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(In percentages) | 2009 | 2008 | 2007 | |||||||||
Statutory federal income tax rate | 35.0 | 35.0 | 35.0 | |||||||||
State income taxes, net of federal benefit | 2.9 | 27.0 | 2.5 | |||||||||
Other permanent differences | 0.1 | 4.3 | 1.9 | |||||||||
Change in tax law | — | — | (10.7 | ) | ||||||||
Change in deferred rate | (2.7 | ) | (9.9 | ) | (5.4 | ) | ||||||
Other | (2.9 | ) | (4.4 | ) | 4.6 | |||||||
32.4 | 52.0 | 27.9 | ||||||||||
(In thousands) | 2009 | 2008 | ||||||
Current deferred tax assets: | ||||||||
Reserve for uncollectible accounts | $ | 765 | $ | 862 | ||||
Accrued vacation pay deducted when paid | 1,160 | 1,200 | ||||||
Accrued expenses and deferred revenue | 4,045 | 1,538 | ||||||
5,970 | 3,600 | |||||||
Non-current deferred tax assets: | ||||||||
Net operating loss carryforwards | 1,720 | 1,998 | ||||||
Pension and postretirement obligations | 30,952 | 40,184 | ||||||
Stock-based compensation expense | 297 | 251 | ||||||
Derivative instruments | 11,649 | 17,321 | ||||||
State tax credit carryforwards | 2,327 | 2,450 | ||||||
46,945 | 62,204 | |||||||
Non-current deferred tax liabilities: | ||||||||
Goodwill and other intangibles | (39,822 | ) | (44,487 | ) | ||||
Partnership investments | (22,142 | ) | (22,203 | ) | ||||
Property, plant and equipment | (59,692 | ) | (53,648 | ) | ||||
(121,656 | ) | (120,338 | ) | |||||
Net non-current deferred taxes | (74,711 | ) | (58,134 | ) | ||||
Net deferred income tax liabilities | $ | (68,741 | ) | $ | (54,534 | ) | ||
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F-36
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Liability for | ||||
Unrecognized | ||||
(In thousands) | Tax Benefits | |||
Balance at January 1, 2008 | $ | 5,740 | ||
Additions (reductions) for tax positions in the current year | — | |||
Additions for tax positions of prior years | — | |||
Additions (reductions) relating to settlements with taxing authorities | — | |||
Reduction for lapse of federal statute of limitations | — | |||
Reductions for lapse of 2004 state statute of limitations | (81 | ) | ||
Balance at December 31, 2009 | $ | 5,659 | ||
(In thousands) | 2009 | 2008 | ||||||
Fair value of cash flow hedges | $ | (31,891 | ) | $ | (47,513 | ) | ||
Prior service credits and net losses on postretirement plans | (24,229 | ) | (46,598 | ) | ||||
(56,120 | ) | (94,111 | ) | |||||
Deferred taxes | 20,580 | 34,632 | ||||||
Totals | $ | (35,540 | ) | $ | (59,479 | ) | ||
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(In thousands, except per share amounts) | 2009 | 2008 | 2007 | |||||||||
Basic Earnings Per Share Using Two-class Method: | ||||||||||||
Net income | $ | 25,935 | $ | 13,367 | $ | 12,050 | ||||||
Less: net income attributable to noncontrolling interest | 1,030 | 863 | 627 | |||||||||
Net income attributable to common shareholders before allocation of earnings to participating securities | 24,905 | 12,504 | 11,423 | |||||||||
Less: earnings allocated to participating securities | 309 | 241 | 264 | |||||||||
Net income attributable to common stockholders | $ | 24,596 | $ | 12,263 | $ | 11,159 | ||||||
Weighted-average number of common shares outstanding | 29,396 | 29,321 | 25,764 | |||||||||
Net income per common share attributable to common stockholders — basic | $ | 0.84 | $ | 0.42 | $ | 0.43 | ||||||
Diluted Earnings Per Share Using Two-class Method: | ||||||||||||
Net income | $ | 25,935 | $ | 13,367 | $ | 12,050 | ||||||
Less: net income attributable to noncontrolling interest | 1,030 | 863 | 627 | |||||||||
Net income attributable to common shareholders before allocation of earnings to participating securities | 24,905 | 12,504 | 11,423 | |||||||||
Less: earnings allocated to participating securities | 309 | 241 | 264 | |||||||||
Net income attributable to common stockholders | $ | 24,596 | $ | 12,263 | $ | 11,159 | ||||||
Weighted-average number of common shares outstanding (1) | 29,396 | 29,321 | 25,764 | |||||||||
Net income per common share attributable to common stockholders — diluted | $ | 0.84 | $ | 0.42 | $ | 0.43 | ||||||
(1) | to the extent that restricted shares are anti-dilutive, they have been excluded from the calculation of diluted earnings per share in accordance with the applicable accounting guidance. |
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(In thousands) | 2009 | 2008 | 2007 | |||||||||
Telephone operations | $ | 364,548 | $ | 379,027 | $ | 288,174 | ||||||
Other operations | 41,619 | 39,397 | 41,074 | |||||||||
Total net revenue | 406,167 | 418,424 | 329,248 | |||||||||
Operating expense — telephone operations | 211,068 | 214,519 | 154,999 | |||||||||
Operating expense — other operations | 39,166 | 37,813 | 41,953 | |||||||||
Operating expense — impairment charge | — | 6,050 | — | |||||||||
Total operating expense | 250,234 | 258,382 | 196,952 | |||||||||
Depreciation and amortization expense — telephone operations | 84,018 | 90,394 | 63,213 | |||||||||
Depreciation and amortization expense — other operations | 1,209 | 1,284 | 2,446 | |||||||||
Total depreciation expense | 85,227 | 91,678 | 65,659 | |||||||||
Operating income — telephone operations | 69,462 | 74,114 | 68,562 | |||||||||
Operating income — other operations | 1,244 | (5,750 | ) | (1,925 | ) | |||||||
Total operating income | 70,706 | 68,364 | 66,637 | |||||||||
Interest income | 56 | 367 | 893 | |||||||||
Interest expense | (57,991 | ) | (66,659 | ) | (47,350 | ) | ||||||
Investment income | 25,770 | 20,495 | 7,034 | |||||||||
Loss on extinguishment of debt | — | (9,224 | ) | (10,323 | ) | |||||||
Other, net | (207 | ) | (577 | ) | (167 | ) | ||||||
Income before taxes and extraordinary item | $ | 38,334 | $ | 12,766 | 16,724 | |||||||
Capital expenditures: | ||||||||||||
Telephone operations | $ | 41,853 | $ | 47,181 | $ | 32,245 | ||||||
Other operations | 499 | 846 | 1,250 | |||||||||
Total | $ | 42,352 | $ | 48,027 | $ | 33,495 | ||||||
Goodwill: | ||||||||||||
Telephone operations | $ | 519,428 | $ | 519,428 | $ | 519,255 | ||||||
Other operations | 1,134 | 1,134 | 7,184 | |||||||||
Total | $ | 520,562 | $ | 520,562 | $ | 526,439 | ||||||
Total assets: | ||||||||||||
Telephone operations (1) | $ | 1,210,765 | $ | 1,227,320 | $ | 1,281,011 | ||||||
Other operations | 12,278 | 14,306 | 23,580 | |||||||||
Total | $ | 1,223,043 | $ | 1,241,626 | $ | 1,304,591 | ||||||
(1) | Included within the telephone operations segment assets are our equity method investments totaling $49.6 million, $46.8 million and $44.8 million at December 31, 2009, 2008 and 2007, respectively. |
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(In thousands, except per share amounts) | March 31 | June 30 | September 30 | December 31 | ||||||||||||
2009: | ||||||||||||||||
Net revenues | $ | 101,710 | $ | 102,042 | $ | 101,590 | $ | 100,825 | ||||||||
Operating expenses: | ||||||||||||||||
Cost of services and products | 36,100 | 36,344 | 36,151 | 36,865 | ||||||||||||
Selling, general and administrative expenses | 27,877 | 25,850 | 25,600 | 25,447 | ||||||||||||
Depreciation and amortization | 21,677 | 20,981 | 21,341 | 21,228 | ||||||||||||
Total operating expense | 85,654 | 83,175 | 83,092 | 83,540 | ||||||||||||
Operating income | 16,056 | 18,867 | 18,498 | 17,285 | ||||||||||||
Other expenses, net | 9,973 | 6,022 | 8,721 | 7,656 | ||||||||||||
Income before income taxes | 6,083 | 12,845 | 9,777 | 9,629 | ||||||||||||
Income tax expense | 2,386 | 5,186 | 2,494 | 2,333 | ||||||||||||
Net Income | 3,697 | 7,659 | 7,283 | 7,296 | ||||||||||||
Less: Income attributable to noncontrolling interest | 407 | 136 | 226 | 261 | ||||||||||||
Net income attributable to common stockholders | $ | 3,290 | $ | 7,523 | $ | 7,057 | $ | 7,035 | ||||||||
Net income per share attributable to Consolidated Communications Holdings, Inc. common stockholders | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.25 | $ | 0.24 | $ | 0.24 | ||||||||
Diluted | $ | 0.11 | $ | 0.25 | $ | 0.24 | $ | 0.24 | ||||||||
2008: | ||||||||||||||||
Revenues | $ | 105,414 | $ | 106,444 | $ | 103,824 | $ | 102,742 | ||||||||
Operating expenses: | ||||||||||||||||
Cost of services and products | 33,863 | 36,108 | 37,778 | 35,814 | ||||||||||||
Selling, general and administrative expenses | 28,144 | 26,911 | 26,162 | 27,552 | ||||||||||||
Intangible asset impairment | — | — | — | 6,050 | ||||||||||||
Depreciation and amortization | 22,871 | 22,350 | 22,841 | 23,616 | ||||||||||||
Total operating expense | 84,878 | 85,369 | 86,781 | 93,032 | ||||||||||||
Income from operations | 20,536 | 21,075 | 17,043 | 9,710 | ||||||||||||
Other expenses, net | 13,677 | 11,268 | 7,665 | 13,764 | ||||||||||||
Loss on extinguishment of debt | — | 9,224 | — | |||||||||||||
Income (loss) before income taxes | 6,859 | 583 | 9,378 | (4,054 | ) | |||||||||||
Income tax expense (benefit) | 2,878 | 270 | 4,262 | (771 | ) | |||||||||||
Net Income before extraordinary item | 3,981 | 313 | 5,116 | (3,283 | ) | |||||||||||
Extraordinary item ( net of income tax of $4,154) | — | — | — | 7,240 | ||||||||||||
Net income | 3,981 | 313 | 5,116 | 3,957 | ||||||||||||
Less: Income attributable to noncontrolling interest | 272 | 133 | 145 | 313 | ||||||||||||
Net income attributable to common shareholders | $ | 3,709 | $ | 180 | $ | 4,971 | $ | 3,644 | ||||||||
Net income per share attributable to Consolidated Communications Holdings, Inc. common stockholders | ||||||||||||||||
Income per common share before extraordinary item | $ | 0.13 | $ | 0.01 | $ | 0.17 | $ | (0.13 | ) | |||||||
Extraordinary item per share | — | — | — | $ | 0.24 | |||||||||||
Net income per common share — basic | $ | 0.13 | $ | 0.01 | $ | 0.17 | $ | 0.11 | ||||||||
Income per common share before extraordinary item | $ | 0.13 | $ | 0.01 | $ | 0.17 | $ | (0.13 | ) | |||||||
Extraordinary item per share | — | — | — | $ | 0.24 | |||||||||||
Net income per common share — diluted | $ | 0.13 | $ | 0.01 | $ | 0.17 | $ | 0.11 |
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(In thousands) | 2009 | 2008 | 2007 | |||||||||
Allowance for doubtful accounts: | ||||||||||||
Balance at beginning of year | $ | 1,908 | $ | 2,440 | $ | 2,110 | ||||||
North Pittsburgh acquisition | — | — | 471 | |||||||||
Provision charged to expense | 4,812 | 4,819 | 4,734 | |||||||||
Write-offs, less recoveries | (4,924 | ) | (5,351 | ) | (4,875 | ) | ||||||
Balance at end of year | $ | 1,796 | $ | 1,908 | $ | 2,440 | ||||||
Inventory reserve: | ||||||||||||
Balance at beginning of year | $ | 878 | $ | 400 | $ | 429 | ||||||
North Pittsburgh acquisition | — | — | 171 | |||||||||
Provision charged to expense | 542 | 597 | 125 | |||||||||
Write-offs, less recoveries | (719 | ) | (119 | ) | (325 | ) | ||||||
Balance at end of year | $ | 701 | $ | 878 | $ | 400 | ||||||
Income tax valuation allowance: | ||||||||||||
Balance at beginning of year | $ | — | $ | 2,871 | $ | 5,349 | ||||||
North Pittsburgh acquisition | — | — | 1,530 | |||||||||
North Pittsburgh adjustment to goodwill | — | (1,530 | ) | — | ||||||||
Reduction of related deferred tax asset | — | (1,341 | ) | (3,984 | ) | |||||||
Provision charged to expense | — | — | (24 | ) | ||||||||
Release of valuation allowance | — | — | — | |||||||||
Balance at end of year | $ | — | $ | — | $ | 2,871 | ||||||
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March 8, 2010
F-44
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DECEMBER 31, 2009 AND 2008
(Dollars in Thousands)
2009 | 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Accounts receivable, net of allowance of $184 and $225 | $ | 8,627 | $ | 7,964 | ||||
Unbilled revenue | 873 | 784 | ||||||
Due from affiliate | 9,741 | 6,412 | ||||||
Prepaid expenses and other current assets | 20 | 17 | ||||||
Total current assets | 19,261 | 15,177 | ||||||
PROPERTY, PLANT AND EQUIPMENT—Net | 11,993 | 12,418 | ||||||
OTHER ASSETS | 108 | 140 | ||||||
TOTAL ASSETS | $ | 31,362 | $ | 27,735 | ||||
LIABILITIES AND PARTNERS’ CAPITAL | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued liabilities | $ | 2,372 | $ | 2,173 | ||||
Advance billings and customer deposits | 2,509 | 2,392 | ||||||
Total current liabilities | 4,881 | 4,565 | ||||||
LONG TERM LIABILITIES | 203 | 187 | ||||||
Total liabilities | 5,084 | 4,752 | ||||||
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 7) | ||||||||
PARTNERS’ CAPITAL | 26,278 | 22,983 | ||||||
TOTAL LIABILITIES AND PARTNERS’ CAPITAL | $ | 31,362 | $ | 27,735 | ||||
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
2009 | 2008 | 2007 | ||||||||||
OPERATING REVENUES | ||||||||||||
Service revenues, net | $ | 92,054 | $ | 83,807 | $ | 72,777 | ||||||
Equipment, net and other revenues | 23,616 | 24,652 | 23,332 | |||||||||
Total operating revenues | 115,670 | 108,459 | 96,109 | |||||||||
OPERATING COSTS AND EXPENSES: | ||||||||||||
Cost of service (excluding depreciation and amortization related to network assets included below) | 32,875 | 31,276 | 26,726 | |||||||||
Cost of equipment | 23,183 | 25,329 | 22,718 | |||||||||
Selling, general and administrative | 28,396 | 26,566 | 24,645 | |||||||||
Depreciation and amortization | 2,376 | 2,177 | 2,356 | |||||||||
Total operating costs and expenses | 86,830 | 85,348 | 76,445 | |||||||||
OPERATING INCOME | 28,840 | 23,111 | 19,664 | |||||||||
INTEREST INCOME, NET | 455 | 235 | 270 | |||||||||
NET INCOME | $ | 29,295 | $ | 23,346 | $ | 19,934 | ||||||
Allocation of Net Income: | ||||||||||||
Limited Partners | $ | 11,817 | $ | 9,417 | $ | 8,042 | ||||||
General Partner | $ | 17,478 | $ | 13,929 | $ | 11,892 |
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
General | ||||||||||||||||
Partner | Limited Partners | |||||||||||||||
Consolidated | Venus | |||||||||||||||
Communications | Cellular | |||||||||||||||
of Pennsylvania | Telephone | Total | ||||||||||||||
Cellco | Company | Services, | Partners’ | |||||||||||||
Partnership | (Note 1) | Inc. | Capital | |||||||||||||
BALANCE—January 1, 2007 | $ | 10,562 | $ | 4,190 | $ | 2,951 | $ | 17,703 | ||||||||
Distributions | (9,546 | ) | (3,787 | ) | (2,667 | ) | (16,000 | ) | ||||||||
Net income | 11,892 | 4,719 | 3,323 | 19,934 | ||||||||||||
BALANCE—December 31, 2007 | 12,908 | 5,122 | 3,607 | 21,637 | ||||||||||||
Distributions | (13,125 | ) | (5,207 | ) | (3,668 | ) | (22,000 | ) | ||||||||
Net income | 13,929 | 5,525 | 3,892 | 23,346 | ||||||||||||
BALANCE—December 31, 2008 | 13,712 | 5,440 | 3,831 | 22,983 | ||||||||||||
Distributions | (15,512 | ) | (6,154 | ) | (4,334 | ) | (26,000 | ) | ||||||||
Net income | 17,478 | 6,934 | 4,883 | 29,295 | ||||||||||||
BALANCE—December 31, 2009 | $ | 15,678 | $ | 6,220 | $ | 4,380 | $ | 26,278 | ||||||||
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 29,295 | $ | 23,346 | $ | 19,934 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 2,376 | 2,177 | 2,356 | |||||||||
Provision for losses on accounts receivable | 391 | 483 | 278 | |||||||||
Changes in certain assets and liabilities: | ||||||||||||
Accounts receivable | (1,054 | ) | (1,809 | ) | (1,149 | ) | ||||||
Unbilled revenue | (89 | ) | (57 | ) | 409 | |||||||
Prepaid expenses and other current assets | (3 | ) | — | (1 | ) | |||||||
Accounts payable and accrued liabilities | 212 | 58 | (390 | ) | ||||||||
Advance billings and customer deposits | 117 | 295 | 302 | |||||||||
Other long term liabilities | 16 | 27 | 11 | |||||||||
Net cash provided by operating activities | 31,261 | 24,520 | 21,750 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures from affiliates, net | (1,932 | ) | (2,453 | ) | (3,206 | ) | ||||||
Purchase of Customers from an affiliate | — | (182 | ) | — | ||||||||
Change in due from affiliate, net | (3,329 | ) | 115 | (2,544 | ) | |||||||
Net cash used in investing activities | (5,261 | ) | (2,520 | ) | (5,750 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Distributions to partners | (26,000 | ) | (22,000 | ) | (16,000 | ) | ||||||
Net cash used in financing activities | (26,000 | ) | (22,000 | ) | (16,000 | ) | ||||||
CHANGE IN CASH | — | — | — | |||||||||
CASH—Beginning of year | — | — | — | |||||||||
CASH—End of year | $ | — | $ | — | $ | — | ||||||
NONCASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Accruals for capital expenditures | $ | 2 | $ | 15 | $ | 14 | ||||||
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
1. | ORGANIZATION AND MANAGEMENT |
Pennsylvania RSA 6 (II) Limited Partnership—Pennsylvania RSA 6 (II) Limited Partnership (the “Partnership”) was formed on January 31, 1991. The principal activity of the Partnership is providing cellular service in the Pennsylvania 6 (II) rural service area. Under the terms of the partnership agreement, the partnership expires on January 1, 2091. |
The partners and their respective ownership percentages as of December 31, 2009, 2008 and 2007 are as follows: |
General Partner: | ||||
Cellco Partnership* (“General Partner”) | 59.66 | % | ||
Limited Partners: | ||||
Consolidated Communications of Pennsylvania Company** | 23.67 | % | ||
Venus Cellular Telephone Services, Inc | 16.67 | % |
* | Cellco Partnership (“Cellco”) doing business as Verizon Wireless. | |
** | On January 1, 2008 North Pittsburgh Telephone Company changed its name to Consolidated Communications of Pennsylvania Company. |
2. | SIGNIFICANT ACCOUNTING POLICIES |
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, depreciation and amortization, useful lives and impairment of assets, accrued expenses, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. |
Revenue Recognition— The Partnership earns revenue by providing access to our network (access revenue) and for usage of our network (usage revenue), which includes voice and data revenue. Customers are associated with the partnership based upon mobile identification number. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings in the balance sheet. Usage revenue is recognized when service is rendered and included in unbilled revenue until billed. Equipment sales revenue associated with the sale of wireless devices is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. Customer activation fees are considered additional consideration, and to the extent that we incur costs in excess of fees, these fees are recorded as equipment and other revenue at the time of customer acceptance. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record revenue gross. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (See Note 5). |
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The Partnership reports, on a gross basis, taxes imposed by governmental authorities on revenue-producing transactions between us and our customers that are within the scope of the accounting standard related to how taxes collected from customers and remitted to governmental authorities should be presented in the statement of operations in the financial statements. |
Cellular service revenues and expenses resulting from cell site agreements with affiliates of Cellco are recognized based upon a rate per minute of use. See note 5. |
Operating Costs and Expenses—Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of certain selling, general and administrative, and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services performed on behalf of the Partnership. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions or minutes of use, are reasonable. The roaming rates charged to the Partnership by Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5). |
Retail Stores—The daily operations of all retail stores located within the Partnership’s operating area are managed by Cellco. However all income and expenses incurred by and fixed assets and liabilities related to these retail stores are recorded on the books of the Partnership. |
Income Taxes—The Partnership is not a taxable entity for federal and state income tax purposes. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually. |
Inventory—Inventory is owned by Cellco and is not recorded on the Partnership’s financial statements. Upon sale, the related cost of the inventory is transferred to the Partnership at Cellco’s cost basis and included in the accompanying statements of operations. |
Allowance for Doubtful Accounts—The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on the aging of the accounts receivable balances and the historical write-off experience, net of recoveries. |
Property, Plant and Equipment—Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on mobile telephone switching offices and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred. |
Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the statements of operations. All property, plant and equipment purchases are made through an affiliate of Cellco. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value. |
Network engineering and interest costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction-in-progress until the projects are completed and placed into service. |
Other Assets —Other assets consist of a customer list acquired in 2008. The Partnership amortizes the customer list over its expected useful life of 6 years using a method consistent with historical customer turnover rates. As of December 31, 2009, the gross carrying value is $182 and the accumulated amortization is $74. As of December 31, 2009, the scheduled amortization of the customer list for the next four years is $27 for the years 2010 through 2013. |
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FCC Licenses— The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely and at nominal costs, which are expensed as incurred. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of Cellco. The current term of the Partnership’s FCC license expires in October 2010 and April 2017. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s cellular license. |
Valuation of Assets— Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. |
Cellco re-evaluates the useful life determination for wireless licenses at least annually to determine whether events and circumstances continue to support an indefinite useful life. Moreover, Cellco has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Partnership’s wireless licenses. |
Cellco tests its wireless licenses for potential impairment annually, and more frequently if indications of impairment exist. Cellco evaluates its licenses on an aggregate basis, using a direct income-based value approach. This approach estimates fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, an impairment is recognized. In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Cellco does not charge the Partnership for the use of any FCC license recorded on its books (except for the annual cost of $30 related to the spectrum lease, as discussed in Note 5).Cellco evaluated its wireless licenses for potential impairment as of December 15, 2009 and December 15, 2008. These evaluations resulted in no impairment of wireless licenses. |
Fair Value Measurements — In accordance with the accounting standard regarding fair value measurements, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This accounting standard also establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value: |
Level 1 — Quoted prices in active markets for identical assets or liabilities |
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities |
Level 3 — No observable pricing inputs in the market |
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. |
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Concentrations—To the extent the Partnership’s customer receivables become delinquent, collection activities commence. No single customer is large enough to present a significant financial risk to the Partnership. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable. |
Cellco and the Partnership rely on local and long-distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results. |
Although Cellco attempts to maintain multiple vendors for its network assets and inventory, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet Cellco’s needs as it builds out its network infrastructure and sells service and equipment, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results. |
Financial Instruments—The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value. |
Due from affiliate—Due from affiliate principally represents the Partnership’s cash position. Cellco manages, on behalf of the Partnership, all cash, inventory, investing and financing activities of the Partnership. As such, the change in due from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership. |
Additionally, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant and equipment transactions with affiliates, are charged to the Partnership through this account. Interest income or interest expense is based on the average monthly outstanding balance in this account and is calculated by applying the Cellco’s average cost of borrowing from Verizon Global Funding, a wholly-owned subsidiary of Verizon Communications, Inc., which was approximately 5.8%, 4.0%, and 5.4% for the years ended December 31, 2009, 2008 and 2007, respectively. Included in net interest income is interest income of $460, $240, and $273 for the years ended December 31, 2009, 2008 and 2007, respectively, related to the due from affiliate. |
Distributions —Distributions are made to partners at the discretion of the General Partner based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of distribution. |
Recently Adopted Accounting Pronouncements— The adoption of the following accounting standards and updates during 2009 did not result in a significant impact to the Partnership financial statements: |
On January 1, 2009, the Partnership adopted the accounting standard regarding the determination of the useful life of intangible assets that removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. This standard also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangements. |
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On June 15, 2009, the Partnership adopted the accounting standard regarding the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued. This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On June 15, 2009, the Partnership adopted the accounting standard that amends the requirements for disclosures about fair value of financial instruments This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On June 15, 2009, the Partnership adopted the accounting standard regarding estimating fair value measurements when the volume and level of activity for the asset or liability has significantly decreased which also provides guidance for identifying transactions that are not orderly. This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On August 28, 2009, the Partnership adopted the accounting standard update regarding the measurement of liabilities at fair value. This standard update provides techniques to use in measuring fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. This standard update is effective prospectively for all annual reporting periods upon issuance. |
Other Recent Accounting Standard —In September 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all period presented. The Partnership is currently evaluating the impact this standard update will have on our consolidated financial statements. |
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3. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consist of the following as of December 31, 2009 and 2008: |
Useful Lives | 2009 | 2008 | ||||||||
Buildings and improvements | 10-40 years | $ | 6,321 | $ | 5,915 | |||||
Cellular plant equipment | 3-15 years | 20,401 | 22,043 | |||||||
Furniture, fixtures and equipment | 2-5 years | 550 | 346 | |||||||
Leasehold improvements | 5 years | 1,383 | 1,068 | |||||||
28,655 | 29,372 | |||||||||
Less accumulated depreciation and amortization | 16,662 | 16,954 | ||||||||
Property, plant and equipment, net | $ | 11,993 | $ | 12,418 | ||||||
Capitalized network engineering costs of $89 and $126 were recorded during the years ended December 31, 2009 and 2008 respectively. Construction-in-progress included in certain of the classifications shown above, principally cellular plant equipment, amounted to $207 and $154 at December 31, 2009 and 2008 respectively. |
4. | CURRENT LIABILITIES |
Accounts payable and accrued liabilities consist of the following as of December 31, 2009 and 2008: |
2009 | 2008 | |||||||
Accounts payable | $ | 1,983 | $ | 1,784 | ||||
Accrued liabilities | 389 | 389 | ||||||
Accounts payable and accrued libilities | $ | 2,372 | $ | 2,173 | ||||
Advance billings and customer deposits consist of the following as of December 31, 2009 and 2008: |
2009 | 2008 | |||||||
Advance billings | $ | 2,357 | $ | 2,220 | ||||
Customer deposits | 152 | 172 | ||||||
Advance billings and customer deposits | $ | 2,509 | $ | 2,392 | ||||
5. | TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES |
Affiliate transactions include, but are not limited to, allocations, intra-company roaming, the salaries and related expenses of employees of Cellco, PCS spectrum lease payments and direct payments to a related party of the Partnership, such as rent or commissions. Revenues and expenses were allocated based on the Partnership’s percentage of customers or gross customer additions or minutes of use, where applicable. Cellco believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length. |
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Significant transactions with affiliates (Cellco and its related entities) and other related parties, including allocations and direct charges, are summarized as follows for the years ended December 31, 2009, 2008 and 2007: |
2009 | 2008 | 2007 | ||||||||||
Service revenues (a) | $ | 17,610 | $ | 15,720 | $ | 13,707 | ||||||
Equipment and other revenues (b) | 350 | 1,066 | 1,084 | |||||||||
Cost of service (c) | 31,513 | 29,439 | 25,803 | |||||||||
Cost of equipment (d) | 1,358 | 1,354 | 1,089 | |||||||||
Selling, general and administrative (e) | 19,384 | 17,040 | 15,889 |
(a) | Service revenues include roaming revenues relating to customers of other affiliated markets, long-distance, data and allocated contra-revenues including revenue concessions. | |
(b) | Equipment and other revenues include cell sharing revenues, sales of handsets and accessories and allocated contra-revenues including equipment concessions and coupon rebates. | |
(c) | Cost of service includes roaming costs relating to customers roaming in other affiliated markets, switch costs, cell sharing costs and allocated cost of telecom, long-distance, and handset applications. | |
(d) | Cost of equipment includes allocated handsets, accessories, warehousing and freight. | |
(e) | Selling, general and administrative expenses include salaries, commissions and billing, and allocated office telecom, customer care, sales and marketing, advertising, and commissions. |
On January 1, 2008, the Partnership purchased 318 customers from an affiliate for $182. |
The Partnership is involved in several cell sharing agreements with related affiliates in which the Partnership receives revenues from affiliates for the use of the Partnership’s cell sites and incurs costs for the use of affiliates’ cell sites. Cell sharing revenues were $1,126, $1,419 and $1,447 for the years ended December 31, 2009, 2008 and 2007, respectively. Cell sharing costs were $1,794, $2,240 and $1,880 for the years ended December 31, 2009, 2008 and 2007 respectively. |
On January 1, 2007, the Partnership entered into lease agreements for the right to use additional spectrum owned by Cellco. The initial term of these agreements is ten years. The 2009, 2008 and 2007 annual lease commitment of $30, $30 and $29 respectively represents the costs of financing the spectrum, and does not necessarily reflect the economic value of the services received. No additional spectrum purchases or lease commitments have been entered into by the Partnership as of December 31, 2009. |
6. | COMMITMENTS |
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, equipment and spectrum used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancelable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancelable lease term. For the years ended December 31, 2009, 2008 and 2007, the Partnership recognized a total of $1,188, $1,100 and $853, respectively, as rent expense related to payments under these operating leases, which was included in cost of service and general and administrative expenses in the accompanying statements of operations. |
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Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows: |
Years | Amount | |||
2010 | $ | 1,113 | ||
2011 | 1,065 | |||
2012 | 990 | |||
2013 | 942 | |||
2014 | 790 | |||
2015 and thereafter | 7,790 | |||
Total minimum payments | $ | 12,690 | ||
From time to time Cellco enters into purchase commitments, primarily for network equipment, on behalf of the Partnership. |
7. | CONTINGENCIES |
Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance. |
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2009 cannot be ascertained. The potential effect, if any, on the financial statements of the Partnership, in the period in which these matters are resolved, may be material. |
In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership. |
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8. | RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS |
Balance at | Additions | Write-offs | Balance at | |||||||||||||
Beginning | Charged to | Net of | End | |||||||||||||
of the Year | Operations | Recoveries | of the Year | |||||||||||||
Accounts Receivable Allowances: | ||||||||||||||||
2009 | $ | 225 | $ | 391 | $ | (432 | ) | $ | 184 | |||||||
2008 | 154 | 483 | (412 | ) | 225 | |||||||||||
2007 | 202 | 278 | (326 | ) | 154 |
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March 8, 2010
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DECEMBER 31, 2009 AND 2008
(Dollars in Thousands)
2009 | 2008 | |||||||
ASSETS | ||||||||
CURRENT ASSETS: | ||||||||
Accounts receivable, net of allowance of $480 and $385 | $ | 3,735 | $ | 3,388 | ||||
Unbilled revenue | 1,521 | 1,051 | ||||||
Due from affiliate | 14,469 | 6,320 | ||||||
Prepaid expenses and other current assets | 16 | 20 | ||||||
Total current assets | 19,741 | 10,779 | ||||||
PROPERTY, PLANT AND EQUIPMENT—Net | 54,672 | 50,719 | ||||||
TOTAL ASSETS | $ | 74,413 | $ | 61,498 | ||||
LIABILITIES AND PARTNERS’ CAPITAL | ||||||||
CURRENT LIABILITIES: | ||||||||
Accounts payable and accrued liabilities | $ | 2,589 | $ | 1,896 | ||||
Advance billings and customer deposits | 997 | 940 | ||||||
Total current liabilities | 3,586 | 2,836 | ||||||
LONG TERM LIABILITIES | 370 | 335 | ||||||
Total liabilities | 3,956 | 3,171 | ||||||
COMMITMENTS AND CONTINGENCIES (see Notes 6 and 7) | ||||||||
PARTNERS’ CAPITAL | 70,457 | 58,327 | ||||||
TOTAL LIABILITIES AND PARTNERS’ CAPITAL | $ | 74,413 | $ | 61,498 | ||||
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
2009 | 2008 | 2007 | ||||||||||
OPERATING REVENUES | ||||||||||||
Service revenues, net | $ | 69,844 | $ | 55,376 | $ | 48,096 | ||||||
Equipment, net and other revenues | 4,381 | 5,081 | 4,341 | |||||||||
Total operating revenues | 74,225 | 60,457 | 52,437 | |||||||||
OPERATING COSTS AND EXPENSES | ||||||||||||
Cost of service (excluding depreciation and amortization related to network assets included below) | 18,908 | 17,327 | 15,028 | |||||||||
Cost of equipment | 7,537 | 6,609 | 5,085 | |||||||||
Selling, general and administrative | 16,925 | 16,132 | 14,142 | |||||||||
Depreciation and amortization | 7,362 | 6,013 | 5,020 | |||||||||
Total operating costs and expenses | 50,732 | 46,081 | 39,275 | |||||||||
OPERATING INCOME | 23,493 | 14,376 | 13,162 | |||||||||
OTHER INCOME: | ||||||||||||
Interest income, net | 637 | 142 | 550 | |||||||||
Total other income | 637 | 142 | 550 | |||||||||
NET INCOME | $ | 24,130 | $ | 14,518 | $ | 13,712 | ||||||
Allocation of Net Income: | ||||||||||||
Limited partners | $ | 19,303 | $ | 11,614 | $ | 10,970 | ||||||
General Partner | $ | 4,827 | $ | 2,904 | $ | 2,742 |
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
General | ||||||||||||||||||||||||||||
Partner | Limited Partners | |||||||||||||||||||||||||||
San | Eastex | Consolidated | ALLTEL | San | ||||||||||||||||||||||||
Antonio | Telecom | Telecom | Communications | Communications | Antonio | Total | ||||||||||||||||||||||
MTA, | Investments, | Supply, | Transport | Investments, | MTA, | Partners’ | ||||||||||||||||||||||
L.P. | L.P. | Inc. | Company | Inc. | L.P. | Capital | ||||||||||||||||||||||
BALANCE—January 1, 2007 | $ | 9,220 | $ | 7,846 | $ | 7,846 | $ | 7,846 | $ | 7,846 | $ | 5,493 | $ | 46,097 | ||||||||||||||
Distributions | (2,200 | ) | (1,872 | ) | (1,872 | ) | (1,872 | ) | (1,872 | ) | (1,312 | ) | (11,000 | ) | ||||||||||||||
Net income | 2,742 | 2,334 | 2,334 | 2,334 | 2,334 | 1,634 | 13,712 | |||||||||||||||||||||
BALANCE—December 31, 2007 | 9,762 | 8,308 | 8,308 | 8,308 | 8,308 | 5,815 | 48,809 | |||||||||||||||||||||
Distributions | (1,000 | ) | (851 | ) | (851 | ) | (851 | ) | (851 | ) | (596 | ) | (5,000 | ) | ||||||||||||||
Net income | 2,904 | 2,471 | 2,471 | 2,471 | 2,471 | 1,730 | 14,518 | |||||||||||||||||||||
BALANCE—December 31, 2008 | 11,666 | 9,928 | 9,928 | 9,928 | 9,928 | 6,949 | 58,327 | |||||||||||||||||||||
Distributions | (2,401 | ) | (2,042 | ) | (2,042 | ) | (2,042 | ) | (2,042 | ) | (1,431 | ) | (12,000 | ) | ||||||||||||||
Net income | 4,827 | 4,107 | 4,107 | 4,107 | 4,107 | 2,875 | 24,130 | |||||||||||||||||||||
BALANCE—December 31, 2009 | $ | 14,092 | $ | 11,993 | $ | 11,993 | $ | 11,993 | $ | 11,993 | $ | 8,393 | $ | 70,457 | ||||||||||||||
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
2009 | 2008 | 2007 | ||||||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
Net income | $ | 24,130 | $ | 14,518 | $ | 13,712 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation and amortization | 7,362 | 6,013 | 5,020 | |||||||||
Provision for losses on accounts receivable | 1,014 | 936 | 887 | |||||||||
Changes in certain assets and liabilities: | ||||||||||||
Accounts receivable | (1,361 | ) | (1,318 | ) | (1,291 | ) | ||||||
Unbilled revenue | (470 | ) | (99 | ) | 95 | |||||||
Prepaid expenses and other current assets | 4 | (12 | ) | 5 | ||||||||
Accounts payable and accrued liabilities | 645 | 542 | (149 | ) | ||||||||
Advance billings and customer deposits | 57 | 167 | 152 | |||||||||
Long term liabilities | 35 | 65 | 24 | |||||||||
Net cash provided by operating activities | 31,416 | 20,812 | 18,455 | |||||||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
Capital expenditures from affiliates, net | (11,267 | ) | (16,895 | ) | (10,799 | ) | ||||||
Change in due from affiliate, net | (8,149 | ) | 1,083 | 3,344 | ||||||||
Net cash used in investing activities | (19,416 | ) | (15,812 | ) | (7,455 | ) | ||||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||||||
Distributions to partners | (12,000 | ) | (5,000 | ) | (11,000 | ) | ||||||
Net cash used in financing activities | (12,000 | ) | (5,000 | ) | (11,000 | ) | ||||||
CHANGE IN CASH | — | — | — | |||||||||
CASH—Beginning of year | — | — | — | |||||||||
CASH—End of year | $ | — | $ | — | $ | — | ||||||
NONCASH TRANSACTIONS FROM INVESTING AND FINANCING ACTIVITIES: | ||||||||||||
Accruals for capital expenditures | $ | 249 | $ | 178 | $ | 242 |
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YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
(Dollars in Thousands)
1. | ORGANIZATION AND MANAGEMENT |
GTE Mobilnet of Texas #17 Limited Partnership—GTE Mobilnet of Texas #17 Limited Partnership (the “Partnership”) was formed on June 13, 1989. The principal activity of the Partnership is providing cellular service in the Texas #17 rural service area. |
The partners and their respective ownership percentages as of December 31, 2009, 2008 and 2007 are as follows: |
General Partner: | ||||
San Antonio MTA, L.P.* | 20.0000 | % | ||
Limited Partners: | ||||
Eastex Telecom Investments, L.P. | 17.0213 | % | ||
Telecom Supply, Inc. | 17.0213 | % | ||
Consolidated Communications Transport Company | 17.0213 | % | ||
ALLTEL Communications Investments, Inc.* | 17.0213 | % | ||
San Antonio MTA, L.P.* | 11.9148 | % |
* | San Antonio MTA, L.P. (“General Partner”) and ALLTEL Communications Investments, Inc. are wholly-owned subsidiaries of Cellco Partnership (“Cellco”) doing business as Verizon Wireless. |
2. | SIGNIFICANT ACCOUNTING POLICIES |
Use of Estimates—The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Estimates are used for, but not limited to, the accounting for: allocations, allowance for uncollectible accounts receivable, unbilled revenue, depreciation and amortization, useful lives and impairment of assets, accrued expenses, and contingencies. Estimates and assumptions are periodically reviewed and the effects of any material revisions are reflected in the financial statements in the period that they are determined to be necessary. |
Revenue Recognition— The Partnership earns revenue by providing access to our network (access revenue) and for usage of our network (usage revenue), which includes voice and data revenue. Customers are associated with the Partnership based upon mobile identification number. In general, access revenue is billed one month in advance and is recognized when earned; the unearned portion is classified in advance billings in the balance sheet. Usage revenue is recognized when service is rendered and included in unbilled revenue until billed. Equipment sales revenue associated with the sale of wireless devices is recognized when the products are delivered to and accepted by the customer, as this is considered to be a separate earnings process from the sale of wireless services. Customer activation fees are considered additional consideration, and to the extent that we incur costs in excess of fees, these fees are recorded as equipment and other revenue at the time of customer acceptance. For agreements involving the resale of third-party services in which we are considered the primary obligor in the arrangements, we record revenue gross. The roaming rates charged by the Partnership to Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (See Note 5). |
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The Partnership reports, on a gross basis, taxes imposed by governmental authorities on revenue-producing transactions between us and our customers that are within the scope of the accounting standard related to how taxes collected from customers and remitted to governmental authorities should be presented in the statement of operations in the financial statements. |
Operating Costs and Expenses—Operating expenses include expenses incurred directly by the Partnership, as well as an allocation of certain selling, general and administrative and operating costs incurred by Cellco or its affiliates on behalf of the Partnership. Employees of Cellco provide services performed on behalf of the Partnership. These employees are not employees of the Partnership and therefore, operating expenses include direct and allocated charges of salary and employee benefit costs for the services provided to the Partnership. Cellco believes such allocations, principally based on the Partnership’s percentage of total customers, customer gross additions or minutes-of-use, are reasonable. The roaming rates charged to the Partnership by Cellco do not necessarily reflect current market rates. The Partnership will continue to re-evaluate the rates on a periodic basis (see Note 5). |
Income Taxes—Except for the Texas Franchise Tax the Partnership is not subject to any domestic federal, state or local taxes based on income. Any taxable income or loss is apportioned to the partners based on their respective partnership interests and is reported by them individually. |
Inventory—Inventory is owned by Cellco and is not recorded on the Partnership’s financial statements. Upon sale, the related cost of the inventory is transferred to the Partnership at Cellco’s cost basis and included in the accompanying statements of operations. |
Allowance for Doubtful Accounts—The Partnership maintains allowances for uncollectible accounts receivable for estimated losses resulting from the inability of customers to make required payments. Estimates are based on the aging of the accounts receivable balances and the historical write-off experience, net of recoveries. |
Property, Plant and Equipment—Property, plant and equipment primarily represents costs incurred to construct and expand capacity and network coverage on mobile telephone switching offices and cell sites. The cost of property, plant and equipment is depreciated over its estimated useful life using the straight-line method of accounting. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the related lease. Major improvements to existing plant and equipment are capitalized. Routine maintenance and repairs that do not extend the life of the plant and equipment are charged to expense as incurred. |
Upon the sale or retirement of property, plant and equipment, the cost and related accumulated depreciation or amortization is eliminated from the accounts and any related gain or loss is reflected in the statements of operations. All property and equipment purchases are made through an affiliate of Cellco. Transfers of property, plant and equipment between Cellco and affiliates are recorded at net book value. |
Network engineering and interest costs incurred during the construction phase of the Partnership’s network and real estate properties under development are capitalized as part of property, plant and equipment and recorded as construction-in-progress until the projects are completed and placed into service. |
FCC Licenses— The Federal Communications Commission (“FCC”) issues licenses that authorize cellular carriers to provide service in specific cellular geographic service areas. The FCC grants licenses for terms of up to ten years. In 1993, the FCC adopted specific standards to apply to cellular renewals, concluding it will reward a license renewal to a cellular licensee that meets certain standards of past performance. Historically, the FCC has granted license renewals routinely and at nominal costs, which are expensed as incurred. All wireless licenses issued by the FCC that authorize the Partnership to provide cellular services are recorded on the books of Cellco. The current term of the Partnership’s FCC license expires in December 2019. Cellco believes it will be able to meet all requirements necessary to secure renewal of the Partnership’s cellular license. |
Valuation of Assets— Long-lived assets, including property, plant and equipment and intangible assets with finite lives, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. |
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Cellco reevaluates the useful life determination for wireless licenses at least annually to determine whether events and circumstances continue to support an indefinite useful life. Moreover, Cellco has determined that there are currently no legal, regulatory, contractual, competitive, economic or other factors that limit the useful life of the Partnership’s wireless licenses. |
Cellco tests its wireless licenses for potential impairment annually, and more frequently if indications of impairment exist. Cellco evaluates its licenses on an aggregate basis, using a direct income-based value approach. This approach estimates fair value using a discounted cash flow analysis to estimate what a marketplace participant would be willing to pay to purchase the aggregated wireless licenses as of the valuation date. If the fair value of the aggregated wireless licenses is less than the aggregated carrying amount of the wireless licenses, an impairment is recognized. In addition, Cellco believes that under the Partnership agreement it has the right to allocate, based on a reasonable methodology, any impairment loss recognized by Cellco for all licenses included in Cellco’s national footprint. Cellco does not charge the Partnership for the use of any FCC license recorded on its books (except for the annual cost of $76 related to the spectrum lease, as discussed in Note 5). Cellco evaluated its wireless licenses for potential impairment as of December 15, 2009 and December 15, 2008. These evaluations resulted in no impairment of wireless licenses. |
Fair Value Measurements — In accordance with the accounting standard regarding fair value measurements, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This accounting standard also establishes a three-tier hierarchy for inputs used in measuring fair value, which prioritizes the inputs used in the valuation methodologies in measuring fair value: |
Level 1 — Quoted prices in active markets for identical assets or liabilities |
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities |
Level 3 — No observable pricing inputs in the market |
Financial assets and financial liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurements. Our assessment of the significance of a particular input to the fair value measurements requires judgment, and may affect the valuation of the assets and liabilities being measured and their placement within the fair value hierarchy. |
Concentrations—To the extent the Partnership’s customer receivables become delinquent, collection activities commence. No single customer is large enough to present a significant financial risk to the Partnership. The Partnership maintains an allowance for losses based on the expected collectibility of accounts receivable. |
Cellco and the Partnership rely on local and long-distance telephone companies, some of whom are related parties, and other companies to provide certain communication services. Although management believes alternative telecommunications facilities could be found in a timely manner, any disruption of these services could potentially have an adverse impact on the Partnership’s operating results. |
Although Cellco attempts to maintain multiple vendors for its network assets and inventory, which are important components of its operations, they are currently acquired from only a few sources. Certain of these products are in turn utilized by the Partnership and are important components of the Partnership’s operations. If the suppliers are unable to meet Cellco’s needs as it builds out its network infrastructure and sells service and equipment, delays and increased costs in the expansion of the Partnership’s network infrastructure or losses of potential customers could result, which would adversely affect operating results. |
Financial Instruments—The Partnership’s trade receivables and payables are short-term in nature, and accordingly, their carrying value approximates fair value. |
Due from affiliate—Due from affiliate principally represents the Partnership’s cash position. Cellco manages, on behalf of the Partnership, all cash, inventory, investing and financing activities. As such, the change in due from affiliate is reflected as an investing activity or a financing activity in the statements of cash flows depending on whether it represents a net asset or net liability for the Partnership. |
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Additionally, administrative and operating costs incurred by Cellco on behalf of the Partnership, as well as property, plant, and equipment transactions with affiliates, are charged to the Partnership through this account. Interest income or interest expense is based on the average monthly outstanding balance in this account and is calculated by applying Cellco’s average cost of borrowing from Verizon Global Funding, a wholly-owned subsidiary of Verizon Communications, Inc., which was approximately 5.8%, 4.0% and 5.4% for the years ended December 31, 2009, 2008 and 2007, respectively. Included in net interest income is interest income of $644, $148 and $554 for the years ended December 31, 2009, 2008 and 2007, respectively, related to the due from affiliate. |
Distributions —The Partnership is required to make distributions to its partners based upon the Partnership’s operating results, cash availability and financing needs as determined by the General Partner at the date of the distribution. |
Recently Adopted Accounting Pronouncements—The adoption of the following accounting standards and updates during 2009 did not result in a significant impact to the Partnership’s financial statements: |
On January 1, 2009, the Partnership adopted the accounting standard regarding the determination of the useful life of intangible assets that removes the requirement to consider whether an intangible asset can be renewed without substantial cost or material modifications to the existing terms and conditions, and replaces it with a requirement that an entity consider its own historical experience in renewing similar arrangements, or a consideration of market participant assumptions in the absence of historical experience. This standard also requires entities to disclose information that enables users of financial statements to assess the extent to which the expected future cash flows associated with the asset are affected by the entity’s intent and/or ability to renew or extend the arrangements. |
On June 15, 2009, the Partnership adopted the accounting standard regarding the general standards of accounting for, and disclosure of, events that occur after the balance sheet date but before the financial statements are issued. This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On June 15, 2009, the Partnership adopted the accounting standard that amends the requirements for disclosures about fair value of financial instruments. This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On June 15, 2009, the Partnership adopted the accounting standard regarding estimating fair value measurements when the volume and level of activity for the asset or liability has significantly decreased which also provides guidance for identifying transactions that are not orderly. This standard was effective prospectively for all annual reporting periods ending after June 15, 2009. |
On August 28, 2009, the Partnership adopted the accounting standard update regarding the measurement of liabilities at fair value. This standard update provides techniques to use in measuring fair value of a liability in circumstances in which a quoted price in an active market for the identical liability is not available. This standard update is effective prospectively for all annual reporting periods upon issuance. |
Other Recent Accounting Standard — In September 2009, the accounting standard regarding multiple deliverable arrangements was updated to require the use of the relative selling price method when allocating revenue in these types of arrangements. This method allows a vendor to use its best estimate of selling price if neither vendor specific objective evidence nor third party evidence of selling price exists when evaluating multiple deliverable arrangements. This standard update is effective January 1, 2011 and may be adopted prospectively for revenue arrangements entered into or materially modified after the date of adoption or retrospectively for all revenue arrangements for all period presented. The Partnership is currently evaluating the impact this standard update will have on the financial statements. |
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3. | PROPERTY, PLANT AND EQUIPMENT |
Property, plant and equipment consist of the following as of December 31, 2009 and 2008: |
Useful lives | 2009 | 2008 | ||||||||
Buildings and improvements | 10-40 years | $ | 20,327 | $ | 18,790 | |||||
Cellular plant equipment | 3-15 years | 62,324 | 54,396 | |||||||
Furniture, fixtures and equipment | 2-10 years | 76 | 75 | |||||||
Leasehold improvements | 5 years | 3,717 | 3,563 | |||||||
86,444 | 76,824 | |||||||||
Less accumulated depreciation and amortization | 31,772 | 26,105 | ||||||||
Property, plant and equipment, net | $ | 54,672 | $ | 50,719 | ||||||
Capitalized network engineering costs of $641 and $565 were recorded during the years ended December 31, 2009 and 2008, respectively. Construction-in-progress included in certain of the classifications shown above, principally cellular plant equipment, amounted to $5,096 and $3,570 at December 31, 2009 and 2008, respectively. |
4. | CURRENT LIABILITIES |
Accounts payable and accrued liabilities consist of the following as of December 31, 2009 and 2008: |
2009 | 2008 | |||||||
Accounts payable | $ | 787 | $ | 551 | ||||
Non-income based taxes and regulatory fees | 1,081 | 600 | ||||||
Texas margin tax payable | 370 | 520 | ||||||
Accrued commissions | 351 | 225 | ||||||
Accounts payable and accrued liabilities | $ | 2,589 | $ | 1,896 | ||||
Advance billings and customer deposits consist of the following as of December 31, 2009 and 2008: |
2009 | 2008 | |||||||
Advance billings | $ | 819 | $ | 732 | ||||
Customer deposits | 178 | 208 | ||||||
Advance billings and customer deposits | $ | 997 | $ | 940 | ||||
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5. | TRANSACTIONS WITH AFFILIATES AND RELATED PARTIES |
Affiliate transactions include, but are not limited to, allocations, intra-company roaming, the salaries and related expenses of employees of Cellco, PCS spectrum lease payments and direct payments to a related party of the Partnership, such as rent or commissions. Revenues and expenses were allocated based on the Partnership’s percentage of customers or gross customer additions or minutes of use, where applicable. Cellco believes the allocations are reasonable. The affiliate transactions are not necessarily conducted at arm’s length. |
Significant transactions with affiliates (Cellco and its related entities) and other related parties, including allocations and direct charges, are summarized as follows for the years ended December 31, 2009, 2008 and 2007: |
2009 | 2008 | 2007 | ||||||||||
Service revenues (a) | $ | 26,920 | $ | 15,459 | $ | 13,035 | ||||||
Equipment and other revenues (b) | (816 | ) | (289 | ) | (259 | ) | ||||||
Cost of service (c) | 16,017 | 13,517 | 11,909 | |||||||||
Cost of equipment (d) | 1,489 | 1,140 | 1,037 | |||||||||
Selling, general and administrative (e) | 10,611 | 9,180 | 8,330 |
(f) | Service revenues include roaming revenues relating to customers of other affiliated markets, long-distance, paging, data and allocated contra-revenues including revenue concessions. | |
(g) | Equipment and other revenues include sales of handsets and accessories and allocated contra-revenues including equipment concessions and coupon rebates. | |
(h) | Cost of service includes roaming costs relating to customers roaming in other affiliated markets, paging, switch usage and allocated cost of telecom, long-distance and handset applications. | |
(i) | Cost of equipment includes allocated handsets, accessories, warehousing and freight. | |
(j) | Selling, general and administrative expenses include commissions and billing, and allocated office telecom, customer care, salaries, sales and marketing, advertising, and commissions. |
On January 1, 2005, the Partnership entered into a lease agreement for the right to use additional spectrum owned by Cellco. The initial term of this agreement was one year, with annual renewal terms. The Partnership renewed the lease through June 23, 2015. The annual lease commitment of $76 represents the costs of financing the spectrum, and does not necessarily reflect the economic value of the services received. No additional spectrum purchases or lease commitments have been entered into by the Partnership as of December 31, 2009. |
6. | COMMITMENTS |
Cellco, on behalf of the Partnership, and the Partnership itself have entered into operating leases for facilities, equipment and spectrum used in its operations. Lease contracts include renewal options that include rent expense adjustments based on the Consumer Price Index as well as annual and end-of-lease term adjustments. Rent expense is recorded on a straight-line basis. The noncancelable lease term used to calculate the amount of the straight-line rent expense is generally determined to be the initial lease term, including any optional renewal terms that are reasonably assured. Leasehold improvements related to these operating leases are amortized over the shorter of their estimated useful lives or the noncancelable lease term. For the years ended December 31, 2009, 2008 and 2007, the Partnership recognized a total of $2,563, $2,511 and $1,811, respectively, as rent expense related to payments under these operating leases, which was included in cost of service in the accompanying statements of operations. |
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Aggregate future minimum rental commitments under noncancelable operating leases, excluding renewal options that are not reasonably assured, for the years shown are as follows: |
Years | Amount | |||
2010 | $ | 2,416 | ||
2011 | 2,188 | |||
2012 | 2,144 | |||
2013 | 2,099 | |||
2014 | 2,013 | |||
2015 and thereafter | 17,693 | |||
Total minimum payments | $ | 28,553 | ||
From time to time Cellco enters into purchase commitments, primarily for network equipment, on behalf of the Partnership. |
7. | CONTINGENCIES |
Cellco is subject to various lawsuits and other claims including class actions, product liability, patent infringement, antitrust, partnership disputes, and claims involving relations with resellers and agents. Cellco is also defending lawsuits filed against itself and other participants in the wireless industry alleging various adverse effects as a result of wireless phone usage. Various consumer class action lawsuits allege that Cellco breached contracts with consumers, violated certain state consumer protection laws and other statutes and defrauded customers through concealed or misleading billing practices. Certain of these lawsuits and other claims may impact the Partnership. These litigation matters may involve indemnification obligations by third parties and/or affiliated parties covering all or part of any potential damage awards against Cellco and the Partnership and/or insurance coverage. All of the above matters are subject to many uncertainties, and outcomes are not predictable with assurance. |
The Partnership may be allocated a portion of the damages that may result upon adjudication of these matters if the claimants prevail in their actions. Consequently, the ultimate liability with respect to these matters at December 31, 2009 cannot be ascertained. The potential effect, if any, on the financial statements of the Partnership, in the period in which these matters are resolved, may be material. |
In addition to the aforementioned matters, Cellco is subject to various other legal actions and claims in the normal course of business. While Cellco’s legal counsel cannot give assurance as to the outcome of each of these matters, in management’s opinion, based on the advice of such legal counsel, the ultimate liability with respect to any of these actions, or all of them combined, will not materially affect the financial statements of the Partnership. |
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8. | RECONCILIATION OF ALLOWANCE FOR DOUBTFUL ACCOUNTS |
Balance at | Additions | Write-offs | Balance at | |||||||||||||
Beginning | Charged to | Net of | End | |||||||||||||
of the Year | Operations | Recoveries | of the Year | |||||||||||||
Accounts Receivable Allowances: | ||||||||||||||||
2009 | $ | 385 | $ | 1,014 | $ | (919 | ) | $ | 480 | |||||||
2008 | $ | 373 | $ | 936 | $ | (924 | ) | $ | 385 | |||||||
2007 | $ | 329 | $ | 887 | $ | (843 | ) | 373 |
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